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Friday August 1, 2014



Google's Earnings Miss Expectations

Google, Inc. (GOOG) reported earnings for the second quarter of 2013 on Thursday, July 18. Though the company's earnings improved when compared to the same period last year, they were still below analysts' expectations.

Google reported revenue of $14.11 billion for the quarter. This represents an increase of 19% from the same period last year. However, analysts had expected earnings of around $14.4 billion.

Google reported quarterly net income of $3.23 billion. Though quarterly net income disappointed analysts, the number represents an increase from the same period last year when the company reported net income of $2.79 billion.

Larry Page, CEO of Google, had this to say about the company's quarterly earnings, "Google had a great quarter with over $14 billion in revenue – up 19% year-on-year. The shift from one screen to multiple screens and mobility creates tremendous opportunity for Google. With more devices, more information and more activity online than ever, the potential to improve people's lives even more is immense."

Google announced its self-driving car project in October of 2010. The purpose of the project is to develop automated cars in order to improve driver safety, energy efficiency and productivity. The goal was to unveil the first self-driving cars to the public in 2017. Currently, the Google team has developed 20 self-driving cars and has driven over 500,000 miles on public roads without an accident. However, recent reports indicate that the timeline to release these vehicles may be pushed back due to legal and policy challenges as well as public perception challenges.

Google, Inc. (GOOG) shares ended the week at $896.60, down 3% for the week.

Microsoft's Earnings Disappoint

Microsoft Corp. (MSFT) reported its quarterly earnings on Thursday, July 18. Revenue numbers were below analysts' expectations. Microsoft has been facing the challenge of dwindling PC sales and tough competition in the smartphone market.

Microsoft reported quarterly revenue of $19.9 billion, missing analysts' expectations by $800 million. However, the number does represent an increase from the same period last year when the company reported revenue of $18.06 billion.

The company announced net income for the quarter of $4.97 billion. This is an improvement from last year when the company reported a net loss of $492 million during the same period.

Microsoft CFO, Amy Hood, had this to say about Microsoft's earnings, "While our fourth quarter results were impacted by the decline in the PC market, we continue to see strong demand for our enterprise and cloud offerings, resulting in a record unearned revenue balance this quarter. We also saw increasing consumer demand for our services like Office 365, Skype and Xbox LIVE. While we have work ahead of us, we are making the focused investments needed to deliver on long-term growth opportunities like cloud services."

Microsoft's research division is working on HomeOS. Essentially, HomeOS would be an operating system for the devices in a "smart house." Although this concept has been a dream of Bill Gates for some time, Microsoft released a white paper detailing the project only last year. At that time 12 such homes were already in existence for purposes of research and development of the technology. Some of the latest innovations are the use of motion sensor technology to enable homeowners to search the internet and operate devices with simply a flick of the wrist.

Microsoft Corporation (MSFT) shares ended the week at $31.40, down 11.95% for the week.

Johnson & Johnson's Earnings Beat Expectations

Johnson & Johnson (JNJ) reported its 2013 second quarter results on Tuesday, July 16. The company reported earnings per share that beat analysts' expectations.

Johnson & Johnson reported revenue of $17.88 billion. This represents an increase from the comparable quarter last year when the company reported revenue of $16.48 billion.

The company reported net income of $3.83 billion. This represents an increase from the same period last year when the company reported net income of $1.41 billion. Also, Johnson & Johnson announced adjusted earnings per share of $1.48, beating analysts' expectations of $1.39 per share.

Alex Gorsky, Chairman and CEO of Johnson & Johnson, commented on the company's second-quarter results saying, "Our strong second-quarter results reflect the progress we've made against our near-term priorities of delivering on our financial commitments, restoring a reliable supply of over-the counter products to consumers, continuing the successful integration of Synthes and building on the momentum in our pharmaceutical business. Our talented colleagues at Johnson & Johnson continue to bring meaningful innovations to patients and consumers around the world and have positioned us well to deliver sustainable growth."

The company recently settled a class action lawsuit for $22.9 million. Last year, the company engaged in the largest recall of children's medicine in its history. It recalled more than 40 non-prescription products after FDA inspectors found bacterial contamination and other problems at a plant in Pennsylvania. The plant was later closed. Shareholders then filed a class action lawsuit alleging that Johnson & Johnson had concealed quality control failures at the plant. The company still denies wrongdoing, but said that they settled to avoid the cost of continued litigation.

Johnson & Johnson (JNJ) shares ended the week at $92.23, up 2.52% for the week.

The Dow started the week at 15,460 and closed at 15,544. The S&P 500 started the week at 1,680 and closed at 1,692. The NASDAQ started the week at 3,601 and closed at 3,588.

Argentine Bond Yields Fall

In 2001, the Argentine government defaulted on nearly $100 billion of foreign debt. The government launched two voluntary exchange offers in 2005 and 2010 in an effort to restructure the debt held by existing bondholders. Not all bondholders agreed to the restructuring. Among the "holdouts" is Elliot Management Corporation, the management company for several hedge funds located in New York City.

Elliot Management held $630 million in Argentine bonds when the country defaulted in 2001. Those obligations are now worth $2.3 billion. As part of restructuring, Argentina offered Elliot Management about $0.30 for every dollar owed. Elliot Management refused the restructuring offer.

In 2003, one of Elliot Management's subsidiaries, NML Capital (NML), sued Argentina in the Southern District of New York to collect on its defaulted obligations. The cases resulted in judgments totaling $1.6 billion and default judgments totaling $900 million in favor of NML. When Argentina did not pay the judgments, NML executed the judgments against Argentine property located in the U.S. In an attempt to learn more about Argentine assets in the U.S., NML filed subpoenas with Bank of America and the National Bank of Argentina's New York branch. The government of Argentina moved to quash these subpoenas arguing that they infringed upon Argentina's sovereign immunity. The District Court and later the Second Circuit both upheld the subpoenas.

The Argentine government has now petitioned the Supreme Court arguing that the subpoenas violate the Foreign Sovereign Immunities Act (FSIA). The latest development is that the International Monetary Fund (IMF) may file an amicus brief supporting Argentina's petition. An amicus brief is filed by someone who is not a party to the litigation but who believes that the court's decision may affect its interest. IMF Managing Director, Christine Lagarde, will ask the IMF executive board to submit an amicus brief on Argentina's behalf.

This news about the IMF's potential involvement caused Argentine bond prices to rise and yields to fall. Argentina's restructured bonds due in 2017 fell 1.86% to 15.22% on Friday, July 19. This represents the lowest level since February 2013. Bond prices rose to about $0.82 on the dollar.

The 10-year Treasury note yield finished the week at 2.49% while the 30-year Treasury note yield finished the week at 3.57%.

Interest Rates Drop Following Bernanke's Comments

Freddie Mac released the results of its weekly Primary Mortgage Market Survey (PMMS) on Thursday, July 18. The results show mortgage rates dropping slightly.

The 15-year fixed mortgage rate averaged 3.41% this week. This is a decrease from last week when it averaged 3.53%. One year ago at this time, the 15-year fixed mortgage rate averaged 2.83%.

This week, the 30-year fixed mortgage rate averaged 4.37%. This represents a decrease from last week when it averaged 4.51%. One year ago, the 30-year fixed mortgage rate averaged 3.53%.

"Fixed mortgage rates fell as Federal Reserve (Fed) Chairman Bernanke helped ease market concerns about the Fed reducing its bond purchases," said Frank Nothaft, Vice President and Chief Economist at Freddie Mac. "During a question and answer session following a speech on July 10th, Chairman Bernanke indicated that a highly accommodative monetary policy is what's needed in the U.S. economy. Indications of a slowing in the economic recovery also placed downward pressure on mortgage rates. Consumer sentiment fell to a three month low in July while retail sales in June grew by only 0.4%, which was half of the market consensus forecast. In addition, housing starts fell in June to the slowest pace since August 2012."

The money market fund finished this week at 0.4%. The 1-year CD finished at 0.6%.

Published July 19, 2013

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