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Saturday September 20, 2014



Nike Enjoys First Week on Dow Jones

Nike, Inc. (NKE) reported its latest quarterly earnings on September 26. Nike announced solid earnings and as a result enjoyed an increase in their stock price last week.

Nike reported quarterly revenue of $6.97 billion, representing an increase of 8% over the comparable period last year. This growth was even more impressive given the fact that Nike grew in every product type and geography except Greater China.

Nike reported net income of $780 million for the quarter. This represents an increase of 38% from the same quarter last year when the company reported net income of $567 million. Basic earnings per share increased 35% from $0.65 per share during the comparable quarter last year to $0.88 per share.

"We had a great first quarter driven by our unrelenting commitment to delivering innovative products and services to athletes around the world," said Mark Parker, President and CEO of Nike, Inc. "Our powerful portfolio of businesses combined with unmatched leadership and resources allows us to capitalize on opportunities that drive long-term value for our shareholders. I am more excited than ever about our potential to continue to innovate with purpose, and fuel Nike's growth."

Earlier this month the Dow Jones Indices, the company that operates the Dow Jones Industrial Average, determined that Hewlett-Packard, Alcoa and Bank of America will be removed from the index and replaced by Goldman Sachs, Visa and Nike beginning September 23. After its first week of trading on the Dow Jones Industrial Average, Nike is up 6.55%.

Nike, Inc. (NKE) shares ended the week at $73.64.

BlackBerry's Nasdaq Days are Numbered

BlackBerry (BBRY), manufacturer of the smartphone of the same name, reported its latest quarterly earnings on September 27. Despite initiatives to compete with the iPhone and Samsung Galaxy, Blackberry has been unable to gain momentum in the marketplace. The company reported heavy losses and will soon be acquired by a consortium headed by Fairfax Financial Holdings Limited.

BlackBerry reported revenue of $1.57 billion for the quarter. Despite seemingly robust sales, the company reported cost of sales of $1.95 billion, making their gross margin negative 23.8%.

The company reported a net loss of $965 million. This loss translated into a loss per share of $1.84, surprising analysts that had predicted a loss of $0.49 per share.

Thorstein Heins, President and CEO of Blackberry, addressed the state of the company and its current rebuilding efforts. "We are very disappointed with our operational and financial results this quarter and have announced a series of major changes to address the competitive hardware environment and our cost structure. We understand how some of the activities we are going through create uncertainty, but we remain a financially strong company with $2.6 billion in cash and no debt. We are focused on our targeted markets, and are committed to completing our transition quickly in order to establish a more focused and efficient company."

BlackBerry announced on Monday that it signed a letter of intent agreement with a consortium led by Fairfax Financial Holdings Limited to acquire the company for $9 per share. This means the consortium would pay about $4.7 billion in total to acquire Blackberry. Fairfax currently owns 10% of the company. The letter of intent is subject to due diligence and negotiations. The parties hope to complete due diligence and negotiate a final acquisition agreement by November 4.

BlackBerry (BBRY) shares ended the week at $8.03, down 2.8% for the week.

Carnival Is Not Out of the Storm

Carnival Corp. (CCL), an international cruise and vacation company, reported its earnings on September 24. Carnival's results and forward guidance disappointed many analysts. Mediocre bookings have plagued the company since the Costa Concordia ran aground in early 2012.

Carnival reported revenue of $4.7 billion for the quarter. This is an improvement of about $42 million from the same period last year.

The company reported net income of $934 million. This is a decrease of about 42.4% from the same period last year when the company reported net income of $1.33 billion. Earnings per share came in at $1.20 per share, which was below analysts' expectations of $1.30 per share.

President and CEO of Carnival Corporation, Arnold Donald, commented on the company's current position. "While some of our current challenges and cost pressures will continue well into next year, we have tremendous opportunities to enhance shareholder value over time. I have spent my initial months gaining a much deeper understanding of our people and our operations. The dedication and enthusiasm of our employees is a great foundation to build upon as we strive to achieve even greater success in consistently exceeding the expectations of our guests. We are investing in gaining an even deeper understanding of what drives consumer vacation decisions and onboard enjoyment. This bodes well for attracting first time cruisers as well as powerfully differentiating our brands relative to others."

Carnival Corp. is still suffering from the bad publicity that it generated after the Costa Concordia disaster and several other ship mishaps. Bookings for the second half of 2013 and early 2014 are below the levels of a year ago. The company has launched a national TV marketing campaign to offset the bad publicity as well as vessel upgrade initiatives to ensure that its vessels are in prime working condition.

Carnival Corp. (CCL) shares ended the week at $32.88, down 11.9% for the week.

The Dow started the week at 15,452 and closed at 15,258. The S&P 500 started the week at 1,711 and closed at 1,692. The NASDAQ started the week at 3,787 and closed at 3,782.

Municipal Credit: A Tale of Struggling Cities

A rash of city and county bankruptcies threatens the stability of the $3.7 trillion municipal bond market. There have been thirty-three municipal bankruptcies since 2000 according to the Tax Foundation. That is nearly triple the rate of municipal bankruptcies in the thirteen years prior to 2000, during which time only thirteen municipalities filed for Chapter 9 bankruptcy protection. In addition, the Kroll Bond Rating Agency's recent report stated that government sectors will likely experience even higher default rates in the near future.

The latest and most notable city to file bankruptcy is Detroit, Michigan. Detroit filed for Chapter 9 bankruptcy protection on July 18, 2013. This municipal bankruptcy filing is the largest in U.S. history as Detroit is defaulting on more than $18 billion in obligations.

Detroit's bankruptcy filing dwarfed the second largest municipal bankruptcy in U.S. history filed by Jefferson County, Alabama in 2011, which defaulted on over $4 billion in obligations. The third largest municipal bankruptcy remains Orange County California's bankruptcy filing in 1994 at $2 billion. Finally, Stockton, California filed for bankruptcy in 2012 defaulting on $1 billion in obligations.

These defaults have caused Wall Street securities firms to begin removing funds from the municipal bond market as risk increases without a notable increase in return. In the quarter ending June 30, brokers and dealers dropped $12 billion in municipal bonds from their portfolios. This is the largest quarterly decline in twenty-seven years. In addition, individual investors dropped $43.7 billion in the seventeen weeks leading up to the third week of September. In the six months between March 20 and September 20, the composite bond yield for 10-Year AAA municipal bonds has risen almost 47%.

Cities have sold 13% less municipal securities this year than last year. "Issuance is likely to remain weak or lower through the rest of the year," said Michael Decker, Co-Head of the Securities Industry and Financial Markets Association's Municipal Securities Division. "So there will be less trading activity and as a result, there will be smaller dealer positions." What this means for municipal credit going forward remains to be seen, but for now, some investors are choosing to exit the municipal bond market.

NOTE: US Treasury bond prices increased for a third consecutive week as concerns intensify that Congress may continue its stalemate long enough to force a government shutdown September 30. "Until we get a resolution from Congress, we will see the safe-haven bid continue," said Guy LeBas, Chief Fixed-Income Strategist at Janney Montgomery Scott LLC. The 10-year Treasury yield fell 11 basis points this week.

The 10-year Treasury note yield finished the week at 2.62% while the 30-year Treasury note yield finished the week at 3.68%.

Interest Rates Fall

Freddie Mac released the results of its weekly Primary Mortgage Market Survey on September 26. The results show average 30-year mortgage rates falling to the lowest levels in over two months as the Fed announced it will continue bond purchases for the foreseeable future.

The 15-year fixed rate mortgage averaged 3.37% this week. This represents a decrease from last week when it averaged 3.54%. One year ago at this time, the 15-year fixed rate mortgage averaged 2.73%.

This week, the 30-year fixed rate mortgage averaged 4.32%. This represents a significant decrease from last week when it averaged 4.5%. Last year at this time, the 30-year fixed rate mortgage averaged 3.4%.

"Mortgage rates fell following the Federal Reserve announcement that it will maintain its bond buying stimulus. These low rates should somewhat offset the house price gains seen the last number of months and keep housing affordability elevated. For instance, the S&P/Case-Shiller® 20-city composite house price index rose 12.4% over the 12-months ending in July, which represented the largest annual increase since February 2006. In addition, more than half of the cities had annual growth exceeding 10% and four cities saw increases exceeding 20%. These increases in home values have also increased homeowner wealth. For example, homeowners experienced an aggregate $1.4 trillion increase in equity in their homes over the first half of this year which contributed to the overall $4.2 trillion gain in household net worth."

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

Published September 27, 2013

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