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Wednesday July 30, 2014



Netflix's Earnings Don't Match Sky-High Expectations

Netflix Inc. (NFLX) announced its second quarter results on July 22. Despite impressive revenue gains and net income that nearly quintupled, high expectations caused the stock price to fall following the announcement.

Netflix added 1.2 million subscribers during the quarter, including 630,000 subscribers in the U.S, which was higher than the 1.1 million added during the same period last year. Though these numbers were impressive, many analysts had expected even more subscribers, with some expecting closer to 800,000 new subscribers in the U.S.

The company did showcase impressive revenue and earnings gains, however. Revenue increased by 20% to $1.07 billion, including a domestic revenue increase of 26%. Net income during the quarter nearly quintupled from $6 million to $29 million.

For many analysts, the seemingly lackluster subscriber gains overshadowed the impressive revenue and earnings numbers. With Netflix debuting the highly-anticipated fourth season of the Fox cancelled show "Arrested Development," analysts had hoped to see greater subscriber gains.

"We thought management was quite defensive about the performance of 'Arrested Development,'" said Bernstein Research analyst Carlos Kirjner. He noted that during its conference call Netflix management "for the first time discussed 'market saturation,' which may be an important change in tone."

In the past year, Netflix has debuted five original series—Lilyhammer, House of Cards, Hemlock Grove, Arrested Development and Orange is the New Black—with more to come in the future. The company is betting that its new original programming, combined with new content deals with Disney and Dreamworks, will continue to draw subscribers. The company is targeting a subscriber base of 60-90 million. Time will tell if it will showcase the content sufficient to reach that goal.

Netflix Inc. (NFLX) shares ended the week at $246.31.

Investors Like Facebook's Earnings

Facebook, Inc. (FB) announced its financial results for the second quarter on July 24. The company's results beat expectations, surprising analysts and causing the stock price to surge.

Facebook reported second quarter revenue of $1.8 billion, which was higher than the $1.2 billion reported during the same quarter last year. Close to 41% of the company's advertising revenue ($654 million) came from mobile advertising, an increase that surpassed analysts' expectations by nearly $200 million.

The company also reported net income during the quarter of $488 million. This represents an increase over the comparable period last year when net income was $295 million.

Facebook founder and CEO, Mark Zuckerberg, had this to say about the great results, "We've made good progress growing our community, deepening engagement and delivering strong financial results, especially on mobile. The work we've done to make mobile the best Facebook experience is showing good results and provides us with a solid foundation for the future."

With its earnings report coming after the close of trading on July 24, Facebook's impressive quarter saw the stock surge over 29% to $34.36 by the close of trading on July 25. Following the latest earnings report, Evercore's Ken Sena believes Facebook's ad pricing and revenue going forward "points to further upside for shares."

Facebook Inc.'s (FB) shares ended the week at $34.01.

Apple's Earnings Beat Expectations

Apple Inc. (AAPL) announced its third quarter results on July 23. Although the company's results beat expectations, investors continue to have doubts about the company's future prospects.

Apple reported third quarter revenue of $35.3 billion compared to $35 billion during the same period last year. The revenue figure was in line with the company's projections of between $34 and $37 billion.

The company also reported net income of $6.9 billion, which was lower than the $8.8 billion the company reported during the comparable period last year. Still, net income was in line with Apple projections.

Tim Cook, Apple CEO, commented on the quarter's results: "We are especially proud of our record June quarter iPhone sales of over 31 million and the strong growth in revenue from iTunes, Software and Services. We are really excited about the upcoming releases of iOS 7 and OS X Mavericks, and we are laser-focused and working hard on some amazing new products that we will introduce in the fall and across 2014."

One notable bright spot for the company was iPhone sales, which topped 31.2 million and beat analysts' expectations of 26.5 million. Some analysts saw this positive news as half-empty, however, fearing that the higher sales figures were the result of increased sales for the cheaper and older iPhone 4 models. Investors' reaction to Apple's latest quarterly figures makes it clear that they continue to await the new products the company plans to release later this year. Until then, investors will remain somewhat cautious regarding the company's future performance.

Apple Inc.'s (AAPL) shares ended the week at $440.99.

The Dow started the week at 15,544 and closed at 15,559. The S&P 500 closed unchanged from the start of the week at 1,692. The NASDAQ started the week at 3,588 and closed at 3,613.

Treasuries Rise on Consumer Confidence News

Treasuries rose slightly on Friday following the release of the consumer confidence index for July. Even with the slight rise, Treasuries have shown little fluctuation as investors await news from the Federal Reserve's policy meeting next week.

Treasuries were showing decent price gains on Friday until the release of the latest consumer confidence numbers. The Thomson Reuters/University of Michigan consumer sentiment index was 85.1 in July, a six-year high. July's index reading of 85.1 beat expectations that the index would be 84 and was higher than June's 84.1.

"The speculation recently that the Federal Reserve will soon begin to taper its bond-buying program may have boosted consumer's confidence," said Andrew Wilkinson, Chief Economic Strategist at Miller Tabak & Co. LLC. "We believe that the diffusion of improved payroll data and growing chatter regarding soon-to-end Fed stimulus have boosted consumers' perceptions of the overall health of the economy," he said.

Following the release of the consumer confidence index, Treasuries lost some of their earlier price gains. The drop in yields on the 10-year note pared back to 2.57% after it had hit a low of 2.55%. Yields move inversely to prices, so as yields fall prices rise. Yields on the 30-year bond fell 1 basis point to 3.63%.

Both the bond and stock markets await news from the Federal Reserve's policy meeting next week. It is possible that the Federal Reserve may announce changes to its bond-purchasing program known as quantitative easing. Most analysts expect the Federal Reserve to keep its current pace of purchases unchanged, however.

There has been some speculation this week regarding the person who will replace Federal Reserve Chairman Ben Bernanke. The favorite to succeed Bernanke is Fed Vice Chair Janet Yellen, but it was recently reported that former Treasury Secretary Larry Summers is also being considered for the post. In the past, Mr. Summers has been critical of quantitative easing, which many analysts and investors feel is important for the continued recovery of the U.S. economy.

The 10-year Treasury note yield finished the week at 2.56% while the 30-year Treasury note yield finished the week at 3.62%.

Interest Rates Edge Downwards

On July 25 Freddie Mac released the results of its weekly Primary Mortgage Market Survey (PMMS). The results showed average fixed mortgage rates easing downwards for the second consecutive week, which is good news for the recovering housing market.

The 15-year fixed rate mortgage averaged 3.39% this week. This represents a decrease from last week when it averaged 3.41%. Last year at this time, the 15-year fixed rate mortgage averaged 2.80%.

The 30-year fixed rate mortgage averaged 4.31% this week. This represents a decrease from last week when it averaged 4.37%. One year ago at this time, the 30-year fixed rate mortgage averaged 3.49%.

Frank Nothaft, Vice President and Chief Economist at Freddie Mac, commented on this week's change in rates, "Mortgage rates eased for the second consecutive week which should help to alleviate market concerns of a slowdown in the housing market. Thus far, existing home sales for June were the second highest since November 2009 and new home sales were the strongest since May 2008. In addition, the low inventories of homes for purchase are putting upward pressure on house prices. For instance, the FHFA purchase-only house price index increased for the 16th consecutive month in May and was 7.3% above the May 2012 figure; May's index level was the highest since September 2008."

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

Published July 26, 2013

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