Wednesday, October 29, 2014

Markets drift lower after FOMC meeting

Dow slid back 31, decliners ahead of advancers 5-4 & NAZ was off 15.  The MLP index fell 2+ to the 509s & the REIT index lost 2+ to the 313s.  Junk bond funds were lower & Treasuries saw selling.  Oil gained for a 2nd day after an Energy Information Administration (EIA) report showed growth in US inventories slowed & gold dropped to nearly 1200 after the FOMC announcement (see graph below).

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CLZ14.NYM....Crude Oil Dec 14....82.11 Up ...0.69 (09%)

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Janet Yellen
Photo:   Bloomberg

The Federal Reserve (FEDP) said it sees further improvement in the labor market while confirming it will end an asset-purchase program that has added $1.66T to its balance sheet.  “Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate,” the FOMC said.  “A range of labor market indicators suggests that underutilization of labor resources is gradually diminishing,” the panel added, modifying earlier language that referred to “significant underutilization” of labor resources.  Policy makers maintained a pledge to keep interest rates low for a “considerable time.”  While saying inflation in the near term will probably be held down by lower energy prices, they repeated language from the Sep statement that “the likelihood of inflation running persistently below 2 percent has diminished somewhat.”  Janet Yellen is completing 2 years of bond purchases that started under Ben Bernanke, as the FED nears its goal for full employment.  She must now chart a course toward the first interest rate increase since 2006 while confronting risks from a slowing global economy & declining inflation.  The FOMC repeated it will consider a wide range of information in deciding when to raise the federal funds rate, which has been held near zero since Dec 2008.  Most FED officials expect to raise the rate next year, according to projections released last month.  The FED will continue reinvesting proceeds from a balance sheet that swelled to a record $4.5T in the course of e rounds of quantitative easing that started in Nov 2008 during the longest & deepest recession since the 1930s.

Fed Cites Improved Labor Market While Ending QE as Planned

Crude oil production climbed to the highest level in at least 3 decades last week as the shale boom moved the country closer to energy independence.  Output rose 0.4% to almost 9M barrels a day, according to weekly EIA estimates that began in Jan 1983.  The monthly data, which goes back to 1920 & is based on data collected by state & federal agencies, shows production at the highest since 1986.  The combination of horizontal drilling & hydraulic fracturing (fracking) has unlocked supplies from shale formations in the central US, including the Bakken regioni in North Dakota & the Eagle Ford in Texas.  The surge in production has helped push oil prices down 16% this year to a 2-year low.  Higher output is filling storage tanks across the country.  US inventories climbed 2M barrels to 379.7M barrels in the latest week, according to the EIA report.  Crude imports dropped 5% last week to 7.1M barrels a day, down 4.8% from a year earlier.  US crude production will grow by 1M barrels a day this year & next to reach 9½M in 2015, the most since 1970, the EIA said in its monthly Short-Term Energy Outlook recently.

U.S. Oil Output Surges to Highest Since 1980s on Shale

The numbers are in for the acquisition by Facebook of mobile-messaging application WhatsApp: The social network paid $22B for a startup that generated $10.2M in revenue last year.  In a regulatory filing, FB disclosed WhatsApp’s financial results for 2012 & 2013.  The messaging service, which reached 400M active users in Dec, generated less than 3¢ in revenue for each one last year.  By comparison, FB paid $55 per user when it acquired the company.  WhatsApp’s net loss was $138M for 2013.  The valuation of the deal was already regarded as lofty, at 19X projected sales.  Still, the results illustrate how far FB has to go to get its money’s worth for the app, which generates revenue by charging 99¢ for subscriptions after a user’s first year.  CEO Mark Zucherberg said he’s in no rush to make money from WhatsApp, or its other growing applications, until they reach 1B users.  “The right strategy is to focus on connecting the people before aggressively turning them into businesses,” he said when discussing FB Q3 earnings.  “Once we get to that scale, then we think they will start to become meaningful businesses in their own right.”  WhatsApp’s revenue growth is going in the right direction, sales more than doubled last year from $3.82M in 2012.  The app now has more than ½B users, & revenue for the first half of this year reached $15.3M.  But the unit’s losses are still widening.  Its net loss for the 6 months that ended in Jun was $232M.  The company paid for WhatsApp mostly with equity, boosted by a rise in its stock price.  Those who praised the acquisition said FB was knocking out a major competitor by bringing it into the company.  “For the next few years our focus is going to continue to be on growth,” Jan Koum, WhatsApp’s CEO, said yesterday.  “We’re going to focus on growth and not do any kind of experimentation with monetization today.”  FB stock dropped $4.91.  If you would like to learn more about FB, click on this link:

Facebook’s $22 Billion WhatsApp Deal Buys $10 Million in Sales

Facebook (FB)

Dow dropped 100 after the announcment, but late day buying reduced that loss.  Traders got what they anticipated from the FED along with a fuzzy outlook for raising interest rates.  A recent forecast by the FED was for the benchmark interest rate, currently near zero, to be 1.375% next Dec, 14 months away.  The FED indicated that the economy was on a stable growth track, even if it's low, which suggests rate hikes are approaching.  Chances are they will come in small increments, indicating that the first one, say 25 basis points, could be in Q1 & that will be followed by small steps going forward which would put the rate at 1.375% by year-end.  Something to think about!!

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