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Monday October 20, 2014



Google Hits a Skid

Google Inc. (GOOG) announced its third quarter results on Thursday, October 16. Though revenue increased, net earnings fell nearly 5% year-over-year.

Google reported that revenue during the fourth quarter was $16.5 billion. This was a 20% increase over the $13.75 billion reported during the same period last year.

“Google had another strong performance this quarter, with revenue up 20% year on year, at $16.5 billion,” said Google CFO Patrick Pichette. “We continue to be excited about the growth in our advertising and emerging businesses.”

Net income during the quarter was $2.81 billion or $4.09 per share. This was an unexpected drop from the $2.97 billion or $4.38 per share reported during the comparable period last year.

For most of its recent history Google has met or exceeded investor expectations. The company’s disappointing third quarter, however, has investors concerned. The net income decline was driven by a 30% increase in operating expenses as Google added close to 3,000 employees during the quarter. In addition, ads—or paid clicks—increased at a slower rate this quarter than expected. Understandably, some investors are concerned that the company could be increasing expenses at a faster rate than revenues can grow, thus diminishing profitability. Because of these concerns Google saw its share price fall close to 3% following the earnings announcement.

Google Inc. (GOOG) shares ended the week at $511.17.

Netflix a Victim of Its Own Success

Netflix Inc. (NFLX), a leading provider of streaming video, announced its third quarter results on Wednesday, October 15. Investors were disappointed that the company’s subscriber growth missed expectations.

Third quarter revenue increased to $1.22 billion compared to $884 million during the same period last year. Net income was also higher year-over-year as it increased to $59 million or $0.96 per share compared to $32 million or $0.52 per share last year.

“Around the world, people are discovering the joy of Internet TV,” said Netflix CEO Reed Hastings and CFO David Wells in a letter to shareholders. “With an incredible variety of original series, films and exclusive licensed content arriving on Netflix in the coming quarters, we will continue to thrill our members and expand our memberships.”

Though Netflix saw impressive gains in revenue and net income during the third quarter, subscriber growth disappointed investors. During the quarter Netflix added nearly 3 million subscribers to bring its global total to around 53 million. That figure, however, was lower than previously forecast.

Netflix appears to be a victim of its own success with the disappointing investor reaction to its third quarter. Not often does a company see significant revenue and income growth that fails to impress Wall Street. So far this year Netflix’s subscriber growth beat the company’s own internal forecasts, but this quarter missed the mark. It did not help that HBO revealed plans this week to make its streaming HBO Go service available for the first time to consumers without a cable subscription. Fortunately, a number of analysts believe investors will eventually look past the lower-than-expected subscriber growth to recognize that Netflix continues to be a great investment.

Netflix Inc. (NFLX) shares ended the week at $357.09.

American Express Has Solid Quarter

American Express Company (AXP) announced its third quarter results on Wednesday, October 15. The company experienced a solid increase in profit even as revenue growth was flat.

The company reported that revenue for the third quarter was $8.33 billion. This was barely an increase over the $8.3 billion reported during the same period last year.

“We delivered another solid quarter of financial results,” said Kenneth I. Chenault, Chairman and CEO. “Over the last couple of years we have delivered solid earnings through a combination of disciplined expense control, a strong balance sheet and targeted investments in growth initiatives. While the economy is stronger, it is not growing as fast or as steadily as most people would like, and those same levers will continue to be an important part of our strategy.”

Net income during the quarter was $1.48 billion or $1.40 per share. This was an 8% increase over the $1.37 billion reported during the comparable period last year.

American Express is unique among its competitors in that it issues its own credit cards while Visa and MasterCard issue theirs through banks. The company’s third quarter was helped by a 9% increase in spending by its customers. Investors had to be pleased to see the world’s largest credit card issuer post solid profit growth amid a lukewarm economic environment.

American Express Company (AXP) shares ended the week at $82.58.

The Dow started the week of 10/13 at 16,535 and closed at 16,380 on 10/17. The S&P 500 started the week at 1,906 and closed at 1,887. The NASDAQ started the week at 4,275 and closed at 4,258.

Treasuries Fall as Economic Confidence Grows

Treasury prices fell on Friday, October 17 as new data provided a positive light on the direction of the U.S. economy. Discouraging global news, however, led investors to believe the Federal Reserve may still hold back interest rate increases.

A positive housing report was released on Friday showing that housing starts increased 6.3% to a 1.02 million annualized rate in September. This was higher than the 957,000 annualized pace recorded for August. Economists had expected the September pace to be 1 million homes.

Further positive news came in the form of the Thompson Reuters consumer sentiment index. This month the index increased to 86.4 from a final reading of 84.6 in September. This month’s reading was the strongest since July 2007 and was better than the expected reading of 84.

In response to the improving U.S. economy Treasury prices fell and yields rose. “As domestic numbers get better, it makes people feel better,” said Kevin Giddis, Executive Vice President and Head of Fixed-Income capital markets at Raymond James & Associates Inc.

Concerns in Europe, however, dampened some of the speculation that an improving U.S. economy would lead the Federal Reserve to increase interest rates in October 2015. Even as the U.S. economy sees positive signs, many analysts are concerned about slowing global growth. As such, analysts believe there is a reduced chance the Federal Reserve will raise interest rates beyond its current zero to 0.25% range.

The 10-year Treasury note yield finished the week of 10/13 at 2.20% while the 30-year Treasury note yield finished the week at 2.97%.

Interest Rates Continue Fall

Freddie Mac released the results of its latest Primary Mortgage Market Survey (PMMS) on Thursday, October 16. The results show mortgage rates falling again this week as Treasury yields dipped lower.

The 30-year fixed rate mortgage averaged 3.97% this week. This was a decrease from last week when it averaged 4.12%.

This week, the 15-year fixed rate mortgage averaged 3.18%. This was down from last week when the 15-year fixed rate mortgage averaged 3.30%.

Frank Nothaft, Vice President and Chief Economist at Freddie Mac, had this to say about this week’s rates: “Mortgage rates were down sharply following the decline in the 10-year Treasury yield for the second straight week. Rates are at their lowest levels since June 2013 amidst continued investor skepticism regarding the precarious economic situation in Europe.”

The money market fund finished the week of 10/13 at 0.4%. The 1-year CD finished at 0.7%.

Published October 17, 2014
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