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Tickers in this Article: DD, AAPL, PFE, CMCSA
Tuesday, January 28, 2014

The Durable Goods and Apple (AAPL) disappointments notwithstanding, emerging market centric worries are a bit less pronounced today following actions by central banks in Turkey, Argentina, and India. The Fed typically gets cited as the primary source of the emerging market turmoil through its QE Taper policy, but the central bank is unlikely to make any changes to its policy as it starts two-day meeting today.

The emerging market calm has helped push pre-open futures in the green for the broad U.S. stock market indexes, except for Nasdaq which is held down by Apple’s sub-par earnings report after the close on Monday. Partly offsetting the seemingly calmer international backdrop is the disappointing Durable Goods report on the home front, which will likely prompt economists to trim their Q4 GDP growth estimates. Not only did the ‘headline’ Durable Goods growth rate miss expectations, but the prior month’s growth pace was also revised down.

Business capital spending has been the weakest link in the U.S. recovery, but November’s strong reading had raised hopes of rising momentum on this front. This report is notoriously volatile, but we haven’t been seeing much about ramped-up capital spending plans from companies on the currently underway Q4 earnings calls eitherr. Most companies instead are announcing new or expanded share buyback programs.

Take this morning’s earnings announcements by such corporate bellwethers as Comcast (CMCSA), Pfizer (PFE) and DuPont (DD). Irrespective of how good or otherwise the earnings reports for each of these three companies were, they all announced bigger buyback programs. Investors like buybacks and management teams are giving them more of it. In fact, companies like Apple that already have generous buyback programs in place are facing activist shareholders demanding even more aggressive buybacks. Hard to make sense of the fact that companies would consider it prudent to invest in their own shares, despite the market's lofty levels, instead of their businesses. But that has been the dominant trend for quite some time now.

The Fed is unlikely to make any changes to its Taper policy as a result of today’s weak Durable Goods report. But it does run counter to the emerging narrative that the U.S. economy was on the cusp of graduating to higher growth pace. What this means is that a downgrade to the business spending outlook is a net negative for GDP growth estimates for the coming quarters. The U.S. economy is no doubt improving, but the pace and magnitude of improvement is likely a lot less pronounced than the market has been banking on.

Sheraz Mian
Director of Research

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