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Wednesday October 1, 2014



FedEx's Earnings Continue to Improve

FedEx Corp. (FDX) reported its first quarter results on September 18. Amidst an effort to cut costs and improve profitability, FedEx reported higher revenue and net income than the first quarter last year.

The company reported revenue of $11 billion for the quarter, an increase of 2% over the $10.8 billion reported during the same period last year. The revenue increase was the result of improved performance by each of the company's transportation segments.

Reflecting cost-cutting initiatives, net income increased 7% to $489 million. During the same period last year net income was $459 million.

"Growth in overall demand for our broad global portfolio of solutions drove our improved first quarter results," said Frederick W. Smith, FedEx Corp. Chairman, President and CEO. "FedEx Express remains focused on reducing costs while facing challenging global economic conditions. Meanwhile, FedEx Ground continues to generate strong profitability on growing customer demand for its services."

FedEx's first quarter results provided strong signals that the company's effort to cut costs and improve profitability is bearing fruit. At the end of August the company announced it had completed 45% of its headcount reduction program, which will result in the departure of close to 3,600 employees. The company has also reduced flights between Asia and the U.S. to better fit demand. The resulting improved profitability caused FedEx's stock price to reach a seven-year high on Wednesday, September 18.

FedEx (FDX) shares ended the week at $116.83.

General Mills Had a Strong Quarter

General Mills, Inc. (GIS) reported its fiscal 2014 first quarter results on September 18. The company was able to generate significant sales growth in a market hurt by low-carb trends.

General Mills reported net sales of $4.37 billion for the quarter, an 8% increase over the same period last year. The company noted that new businesses added 5% to the net sales growth figure.

In line with analysts' expectations, net earnings for the quarter were $459 million, a 16.3% decrease from the $549 million reported during the same period last year. However, adjusted earnings per share, which provide a stronger comparison to prior periods, were up 6% to $0.70 per share.

Encouraged by the company's performance in the first quarter of 2014, Chairman and CEO Ken Powell had this to say, "Our net sales growth in the quarter reflects a healthy mix of gains from established brands, strong introductory shipments for new products, and contributions from new businesses added to our portfolio. These first-quarter results have us on track to achieve the key financial targets we've set for fiscal 2014."

The entire cereals industry has experienced declining sales for the past three years as consumers have shied away from carb-heavy foods toward those higher in protein. Unlike some of its competitors, General Mills has been aggressive in trying to improve sales. It increased advertising spending by 7% in the first quarter. The company attributed this increased spending to a 3% rise in sales.

General Mills, Inc. (GIS) shares ended the week at $48.66.

Adobe's Cloud Business Continues to Grow

Adobe Systems, Inc. (ADBE) announced its third quarter results on September 17. Although earnings were below those from the comparable period last year, the company showed impressive gains in its cloud-based software business.

Adobe reported quarterly revenue of $995 million and net income of $83 million. Both figures were decreases from the comparable period last year, although Adobe's revenue was well within the company's targeted range.

Despite falling revenue and net income, Adobe surprised investors with the announcement that Creative Cloud subscriptions increased 331,000 to 1,031,000. This was welcome news to investors because an increase in cloud-based software subscriptions is seen as imperative to the company's future financial success.

Shantanu Narayen, President and CEO of Adobe, commented on the quarter's results. "We exceeded one million subscriptions during Q3, demonstrating that the transition to Creative Cloud is happening sooner than expected. We successfully completed the acquisition of Neolane, adding a critical cross-channel campaign management solution to the Adobe Marketing Cloud, which will further extend our leadership position in digital marketing."

Because consumers are increasingly abandoning traditional software, investors and analysts are looking to see if software companies such as Adobe can successfully transition to Internet-based-or cloud-based-software. For companies such as Adobe to survive, they must show that cloud-based software can produce profitability even as traditional software begins to fall by the wayside. In that vein, Adobe's cloud-based subscription gains are certainly encouraging to Adobe's investors.

Adobe Systems, Inc. (ADBE) shares ended the week at $52.31.

The Dow started the week at 15,381 and closed at 15,451. The S&P 500 started the week at 1,692 and closed at 1,710. The NASDAQ started the week at 3,755 and closed at 3,775.

Treasuries Rise on Fed Taper Announcement

Treasuries rose significantly last week after the Federal Reserve announced it had no plans to begin tapering bond purchases, a move that surprised some analysts. Even with the announcement, many analysts expect the Federal Reserve to announce a plan to reduce bond purchases following its next policy meeting in October.

Members of the Federal Reserve hinted for months that a tapering announcement was coming. Speculation surrounding the announcement resulted in volatile Treasury prices all summer. After the Fed announced no such plans in August, analysts were all but certain the expected announcement would occur in September. Although the Fed had stated in the past that it would only reduce bond purchases if the economy improved, recent comments from Fed members indicated it was time to taper even though economic indicators had not yet reached desired levels.

Following the Fed's policy meeting this week, Fed Chairman Ben Bernanke commented on the Fed's decision not to taper bond purchases. "Conditions in the job market today are still far from what all of us would like to see," said Bernanke at a Sept. 18 press conference. "The committee has concern that rapid tightening of financial conditions in recent months would have the effect of slowing growth."

Even though the Fed decided to forego tapering at this month's meeting, it is possible the Fed could reduce its monthly bond purchases at its policy meeting in October. "It's possible you could get some data that changes the complexion of the outlook and could make the committee be comfortable with a small taper in October," said Federal Reserve Bank of St. Louis President James Bullard.

Although some analysts were surprised by the Fed's decision to keep bond purchases at current levels, Bullard tried to remind them that the Fed always said the decision would be "data dependent." Furthermore, Bullard indicated the decision not to reduce bond purchases this month was a "borderline decision." This probably means further volatility for Treasury prices as any improvement or weakening in U.S. economic conditions will fuel speculation regarding whether the Fed will decide it is time to taper.

The 10-year Treasury note yield finished the week at 2.73% while the 30-year Treasury note yield finished the week at 3.76%.

Interest Rates Fall on Economic News

Freddie Mac released the results of its weekly Primary Mortgage Market Survey (PMMS) on Thursday, September 19. Average fixed mortgage rates fell this week as signs point to an increasingly fragile economy, a fact that led the Federal Reserve to delay the tapering of its bond buying program. Mortgage rates have risen close to 1% since the beginning of May due to speculation the Fed would begin tapering bond purchases this year.

The 15-year fixed rate mortgage averaged 3.54% this week, down from last week's average of 3.59%. Last year at this time, the 15-year fixed rate mortgage averaged 2.77%.

The 30-year fixed rate mortgage averaged 4.50% this week. This represents a decrease from last week when it averaged 4.57%. 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 rates. "Mortgage rates drifted downwards this week amid signs of a weakening economic recovery. Retail sales rose 0.2% in August which was nearly half of July's 0.4% increase. In addition, industrial production in August grew 0.4%, less than the market consensus forecast. And lastly, consumer sentiment fell for the second consecutive month in September to the lowest reading since April."

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

Published September 20, 2013

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