Sunday, September 28, 2014

Congress May Control the Stock Markets' Destiny With These 3 Upcoming Votes

Source: Flickr user Ryan McFarland.

Since March 2009 the Dow Jones Industrial Average and S&P 500 have been practically unstoppable. Neither abnormally bad weather in the U.S. nor the threat of geopolitical tensions has changed the rising tide of America's iconic stock market.

However, ask Americans how they truly feel about the U.S. as whole or the economy, and you're likely to be painted a far different picture. Based on a Pew Research study released in September, 62% of respondents noted that they were unhappy with the way things were going within the U.S. (note that this was an all-encompassing and general question), while 58% viewed the current economic situation as "bad." Furthermore, 30% expected the economy to worsen over the next 12 months, with an additional 33% predicting that it would "stay the same." It's tough to imagine the economy rising when so many investors have such a bleak view of the economy. 

However, one source could hold the answer as to where stocks head next: the U.S. Congress.

Investors aren't oblivious to the fact that fiscal policy set by lawmakers can affect the course of the U.S. economy and therefore the stock market. Things like corporate and individual tax rates, as well as annual government spending levels, are all determined by the actions of Congress and the president. Actions taken by the U.S. Congress can therefore have wide-ranging impact on the overall health of the U.S. economy and, ultimately, the stock market.

This is an important point to understand, as there are three upcoming issues that Congress will soon have to vote on that could guide where the stock market will head next.

1. The Highway Trust Fund
One of the more pressing issues currently facing Congress is what to do about the Highway Trust Fund. The Fund, which generates revenue from federal gasoline and diesel taxes, is responsible for providing money to assist in constructing and maintaining bridges, roads, mass-transit systems, and select aspects of America's energy infrastructure. According to The Wall Street Journal, roughly $216 billion is spent annually on highway and mass-transit construction and improvements, with the Highway Trust Fund kicking in about one-quarter of that total.

The problem is that the Highway Trust Fund is heading toward insolvency. Had Congress not voted to extend funding through May 2015 (kicking the can down the road once again), the Fund would have been running a negative cash balance by September 2014.  

Source: U.S. Department of Transportation.

The bigger problem is that infrastructure jobs comprise about 14.2 million jobs in this country -- 10% of our workforce -- according to a study from Brookings. In other words, if funding begins to get cut to individual states, the trickle-down effect from contractors to individual workers could result in substantial layoffs. A failure of both political parties to work together on this issue could be devastating to select states that have a higher concentration of infrastructure jobs, as well as the U.S. economy as a whole.

2. The U.S. debt ceiling
Speaking of "kick the can," perhaps no Congressional topic has resulted in more pushback from our nation's two-party system than the debt ceiling.

Source: Flickr user Alan Cleaver.

Put simply, the debt ceiling is the amount of money the U.S. government is authorized to borrow in order to meet its expenses, given that it often runs a budget deficit. Without the ability to borrow money, the U.S. government could potentially default on some of its outstanding loans and may have to shut down critical federal programs, which would entail the furlough of some federal employees.

As you might imagine, the consequences on a financial level of not raising the debt ceiling could be dramatic. Based on data from The Washington Post in October 2013, total government payments sent out would drop by roughly one-third, and Goldman Sachs at the time estimated that U.S. GDP would see a decline of more than 4%! Thankfully, congressional voting diffused the October 2013 government shutdown and, following the 78th debt-ceiling limit hike since 1960, pushed the next U.S. debt ceiling vote out to March 2015.

But what happens next is anyone's guess. Elections are constantly changing the makeup of the House and Senate, which have the potential to alter the debt-ceiling vote. In addition, the lack of a balanced budget remains a constant hindrance to members of Congress opposed to further debt-ceiling raises. Needless to say, March 2015 promises to be quite interesting.

Source: White House via Flickr.

3. The president's annual budget
Lastly, investors will want to keep a close eye on the U.S. budget presented by President Obama, which is usually due by February of the year prior to implementation. In this case, President Obama should be laying out his budget for fiscal 2016 as of February 2015.

The approval of the president's budget proposal by Congress could actually be the most important market-mover of them all, and not necessarily because it may be the first major congressional vote in 2015. I say this because the president's budget includes spending actions that could directly impact the aforementioned Highway Trust Fund and the U.S. debt ceiling, and it could also clue investors in on how much funding is expected to go to GDP-critical industries, particularly the defense and security industries, which accounted for about 19% of the $3.5 trillion spent in 2013.

A drawn-out approval process could dampen investor sentiment and reduce foreign investors' confidence in the U.S. economy, possibly hurting the Dow and S&P 500.

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Monday, September 22, 2014

Coach Investors Should Be Terrified of Michael Kors' Growth

It's no secret that Michael Kors'  (NYSE: KORS  ) success in North America has negatively affected Coach (NYSE: COH  ) . In fact, earlier this year, Coach even admitted that Michael Kors was a direct cause of its poor performance, saying that it had lost market share to Michael Kors in the handbag space. However, as many anticipate and hope for a Coach turnaround, and place their bets on strong international growth, there is one initiative from Michael Kors that should be terrifying for Coach investors.

Its been ugly for Coach
Coach and Michael Kors are both luxury designers with a large North American presence. At the end of Coach's fiscal 2013 report, Coach as a company was more than twice the size of Michael Kors by revenue. However, as of both company's most recent quarters, the gap had closed, and these are two companies of near similar size by sales.

Michael Kors' performance can be traced to consistent revenue growth in excess of 50% annually. Meanwhile, Coach's struggles can be traced to North America, a region where comparable sales have fallen by double digits throughout most of the last year. There is a direct correlation between the success of Michael Kors, and the struggles of Coach.

Coach combats Kors with international growth
During Coach's last fiscal year its revenue fell 5.3%, a far contrast from the 6.6% growth in the year prior. Perhaps the only bright spot for Coach has been international performance, a segment that saw growth of 5.5% during the company's last year.

Specifically, 34% of Coach's annual revenue comes from 35 countries outside North America, mainly China, Japan, and countries in Europe, but the company is also expanding aggressively in other regions throughout Asia and South America.

According to Coach's annual report, it has historically expanded internationally by forming joint ventures or distributor relationships to build market presence, and then by acquiring its partner's interest. It did this with Sumitomo Corporation in 2005 to form Coach Japan; Hackett Limited to expand its European operations; and also to enter Hong Kong, Singapore, and South Korea; and to form Coach China, among others. Notably, Coach continues this strategy today, and noted in its 10-K plans to expand in China, Japan, and Europe in the coming years. 

What's so terrifying?
With all things considered, Coach has clearly taken to international markets to combat Michael Kors' growing dominance in North America. But the problem is, Michael Kors is becoming a major problem for Coach in international markets as well. Specifically, Coach's international growth last year of 5.5% was cut in half from the year prior, perhaps because Michael Kors is becoming relevant in many of Coach's key international markets.

Michael Kors reported $106.6 million during its last quarter in international sales, coming from Europe and Japan; Coach created more than $1.64 billion in international sales last year. Importantly, Michael Kors' comparable sales growth during its last quarter in Europe and Japan were 54.2% and 48.8%, respectively, growth that has been consistent for the better part of 12 months. While Coach does not disclose revenue by specific regions outside of North America, the company has named Europe, Japan, and China as key developed international markets for the company. Therefore, given what Michael Kors has done to Coach in North America, its success in Europe and Japan should be terrifying for Coach investors. 

Michael Kors' international business is much smaller and nowhere near as developed as Coach's, but investors must take notice that Coach's international sales growth did slow last year despite rapid expansion, and like North America, Michael Kors' growth was explosive.

Furthermore, Michael Kors already said in its 10-K that expanding in Europe and Japan remains a key goal looking ahead, and while the company is yet to make its presence felt in China, it should be noted that more than 40% of its goods are manufactured in China. Hence, Michael Kors has a presence, or partnerships, and if it chooses to follow the same expansion path of Coach, acquiring the controlling interest in these Chinese businesses, Michael Kors could likely gain a quick boost in China.

Thus, Michael Kors' continued expansion and growth in Coach's key international markets should be terrifying for investors in the latter. When combined with the likelihood of Michael Kors entering China, Coach's investment value becomes decimated.

Foolish thoughts
Before investing in Coach, investors must consider that the company's only bright spots come outside the U.S., markets where Michael Kors is expanding rapidly.

In retrospect, if Michael Kors decides to enter China -- along with South America and continued European expansion -- Coach's international growth could ultimately decline, or perform similarly to its poor performance in North America. While speculative, Michael Kors' comparable sales growth in Europe and Japan serve as proof that its brand has global appeal, far beyond North America. For Coach investors, this fact is not only disheartening, but scary as Michael Kors enters these markets, and considers it a top priority in the years ahead. 

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Saturday, September 20, 2014

Big Old Jet Dreamliner, DonĂ¢€™t Carry Me Too Far Away

The first half of 2014 was a weak time for durable goods orders, but then came July and, with it, a 22.6% increase in those orders for big-ticket items.

Aircraft orders got credit for much of the jump, and I have found no company that better illustrates that than Boeing Co (BA), which had only a handful of orders for its biggest jets in the first half of the year, then witnessed a virtual explosion of more than 300 orders in July – most of which were for Boeing's larger aircraft.


Boeing's price per share is $126.80, down from its high of $138.10 in January of this year but still significantly higher than where Boeing stood more than five years ago, in March of 2009 ($33.49).

Boeing still seems to be struggling to find buyers for its 787 Dreamliner, a long-range, wide-body jet capable of carrying 210 to 335 passengers. Last month, two customers pulled out of deals for nine of the 10 early models of the jet.

Boeing's biggest problem is the Dreamliners that were built in 2009 and 2010; they have design flaws that render them incapable of flying as far as those that were built after – and they aren't as fuel efficient. Boeing learned from those flaws, and the more recent models are capable of flying greater distances and are much more fuel efficient. They have also been more successful in the marketplace. Boeing is on pace to deliver more than 100 Dreamliners this year.

With a construction price of up to $242 million, those Dreamliners are much more expensive to build than the ones that followed, thanks to lower costs. Revenue for Boeing is higher than it has ever been, and so is net income.



The fight against Ebola is grossly underfunded

ebola economic impact NEW YORK (CNNMoney) The Ebola virus has already killed thousands in West Africa, an immeasurable loss for many families. As medical workers try to quell its spread, global organizations are calculating the economic impact of the disease.

"Their economies are basically being devastated," said Daniel Epstein, a spokesperson for the World Health Organization. "Economic activity has halted in many areas there. The harvest isn't going on. People can't fly in and fly out."

WHO workers even had difficulty flying into the Ebola-stricken nations of Liberia, Sierra Leone and Guinea, Epstein said.

Over 2,600 people have died, according to the latest WHO count. If Ebola is not contained this year, the cost could increase by eight times its current estimate, according to a report published Wednesday by the World Bank Group. Ebola's toll in Liberia alone could affect almost 5% of the country's GDP this year, the World Bank said.

"Our findings make clear that the sooner we get an adequate containment response and decrease the level of fear and uncertainty, the faster we can blunt Ebola's economic impact," said World Bank president Jim Yong Kim in a statement.

In need of aid: The United Nations said this week that $1 billion in aid is needed to contain the Ebola outbreak. But a UN database tally of donations shows that many wealthy Western nations that verbally pledged support have donated paltry sums to fight the disease.

Total donations, including non-binding pledges, to fight Ebola are about $388 million, well under half of the United Nation's estimate, according to data from Financial Tracking Service, a database that tracks humanitarian aid and is managed by the United Nations. The Obama administration announced this week that it hopes to send an additional $500 million in huma! nitarian aid to the West African nations this fiscal year.

Even with the U.S. government's significant aid proposal, the total number would still fall short of the United Nations' estimate of a billion.

UN Secretary-General Ban Ki-moon went as far as saying "our best estimate is that we need a 20-fold increase in assistance" at a meeting this week.

Some private foundations have also stepped in. The Bill and Melinda Gates Foundation has donated over $8 million so far to various organizations to fight Ebola. That is more than the combined donations of Canada, Germany and Spain, according to FTS data.

Overall, the Gates Foundation has pledged $38 million, which eclipses many more countries.

Epstein noted that countries such as Canada contribute to the aid effort in non-monetary ways by sending aid workers and conducting medical research.

"We're also at the stage where people are seeing what the landscape is and figuring out, what's the best way to donate funds?" Epstein said. "In a humanitarian crisis, there are often delays between what people realize what they have to do and what they actually do."

Monday, September 15, 2014

How to Save More Money -- Change the Way You Think About It

Sometimes goals can make us feel glum and discouraged, and other times they can feel invigorating and inspiring. Why is that? It might have something to do with the way the goal is described -- depending on your personality, describing something one way or another can have a huge effect on how you perceive it. 

The same goes for financial goals: most of us would like to save more money, but we often struggle to make it happen. What if, just by understanding the way your mind already works, you could reframe your goals to encourage yourself -- and save more in the process? 

The ways we think about saving
Researchers Gulden Ulkumen and Amar Cheema found that two factors tend to affect how people think about a goal: the level of abstraction (their term is construal) and the specificity of the goal. 

What are levels of goal-setting? They're the abstract portion; in other words, you can think about why you want to save (a high level), or you can think about how you want to save (low level). You can also be more or less specific about a particular goal: For example, you could decide that you want to save as much as possible (low specificity) or save $1,000 (highly specific).

The authors point out that some people naturally gravitate toward higher or lower abstraction in defining their goals. By understanding just that one aspect of how your mind works, you can adjust the specificity of your goal to keep yourself motivated and saving. 

How to make your goals achievable 
All you have to do is match the level to the specificity. Ulkumen and Cheema found that this simple adjustment made people more optimistic about how much they could save -- and more likely to actually do it. The strategy works because it aligns your goal-setting with the way your mind thinks -- instead of working against you, the idea is that is that your goals should work with you.

In other words, a high level of abstraction should be matched with a high level of specificity. So if your goal takes the form of, "I want to save money because I want to put down a deposit on my first home," you'll want to match it with a specific dollar amount. 

In this case, attaching a specific outcome to your goal can help underscore its importance in your mind. That extra dose of importance can help keep you motivated, possibly by giving you something firm to focus on. 

On the other hand, say you think about savings goals in a "how-to" kind of way. In this case, the lower level of abstraction should be matched with a lower level of specificity. Keep the numbers vague; for example, you could tell yourself that you want to save as much as possible by (for example) bringing your lunch to work and planning out your grocery shopping for the week. 

Why wouldn't you want to attach the extra importance of specificity if you're a how-to person? The researchers found that while specific translates to important, it can also translate to more difficult -- especially if you think about your goals in terms of how to achieve them. Instead of introducing the possibility of getting discouraged, focus on the positive steps you're taking to reach your goals. Over the long run, it could help you stay enthusiastic and save even more.

Whether you think in terms of whys or hows, there is a way to set goals that will work with your nature rather than against it. Take the time to figure out which method is better for you. It could set you up for more optimism, more savings, and more success over the long run.   

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Thursday, September 4, 2014

Is Apple's Supply Chain a Risk to the Company?

Apple CEO Tim Cook. Source: Wikimedia Commons.

If the rumors are to be believed, Apple's (NASDAQ: AAPL  ) newest product, the iWatch, will be announced at its Sept. 9 event but possibly won't ship until 2015 because of supply chain issues. This was originally reported by Apple analyst Ming-Chi Kuo, and subsequent memos have pushed back the launch date from October to early next year.

Kuo has a pretty good track record on these things. Based on a thorough analysis of Apple's supply chain, he has been relatively accurate on delays. In fact, he predicted Apple's iPad Mini with Retina display delay in 2013. In addition, he predicts a delay in Apple's larger-size version of its newest iteration -- the iPhone 6, a 5.5-inch "phablet" model -- pushing the release date for that unit back to 2015 as well.

So if two of Apple's three products for this event are delayed, coupled with the iPad Mini Retina last year, does this mean Apple's supply chain presents a risk of sorts to the company?

Supply chains are more difficult than they appear
Most consumers are relatively unaware of supply chains, but let's not understate their importance. Simply put, supply chain management is the process of logistics -- how to create value by moving raw materials to finished products to customer delivery. And while it seems rather boring, and in some ways it is, supply chain management can add value or destroy it.

A slightly ironic point is that these issues seemed to crop up after Tim Cook took the reins. Widely considered a "supply chain maven" among the analyst crowd, Cook started his Apple career as a senior vice president for worldwide operations. Through a relentless focus, he quickly fixed the supply chain, eliminating lags from months to days. Cook was promoted to chief operating officer before becoming the company CEO in the wake of Steve Jobs' declining health.

The issue with revolutionary products ...
Compounding Apple's supply chain problems is its visionary product line. That's a constant issue with revolutionary products -- nobody else has combined these products in the same way before, so the raw materials and work-in-progress inventory processes need to be updated.

It appears there is generally a similar sticking point when it comes to recent supply chain hiccups with displays, especially when combined with a new form factor and new technologies. Apple's iPad Mini Retina combined a new, smaller form factor for its iPad line with the improved and updated Retina display. In addition, reports blame issues with the display/touch-panel interaction for the holdup with the larger, "phablet-like," version of the iPhone 6 and its sapphire cover lens for the iWatch.

Is this a concern for Apple investors?
There's not enough here for long-term investors to be overly concerned with. Even if the rumors are true, Apple appears to be on track to release its 4.7-inch iPhone on schedule. Look for that model to sell briskly during the North American seasonally heavy quarter, like all prior iterations.

The 5.5-inch phablet unit should do well in the Asia-Pacific region, where phablets are more popular and the holiday season isn't as important to move units -- therefore, the delay isn't as important. The short-term risk is that there will be holdouts for the 5.5-inch model in the U.S., but the phablet (defined as 5 inches and above) form factor isn't as popular here, and this is only a short-term concern.

As far as the smartwatch is concerned, this is incremental revenue and profit. Therefore, these expectations don't appear to be valued into the stock. That hasn't stopped a few analysts from attempting to model -- Morgan Stanley's Katy Huberty anticipated between 30 million and 60 million units in its first 12 months of sales at a price of $300 apiece. However, subsequent reports peg the average selling price at $400 per unit.

Final thoughts
As an investor, you'd like for your company to have as few delays as possible. With that being said, long-term investors should give Apple a pass here. As Apple continues to bring new and exciting technologies to its products, at times there will be delays in both supply and manufacturing processes. In addition, Apple's going to take its time bringing a cohesive, end-user-focused, product to market. It isn't always fast, but it's worth waiting for.

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Monday, September 1, 2014

3 Reasons Danaher Corporation's Stock Could Fall

There is no doubt that Danaher Corporation (NYSE: DHR  ) is one of the highest-quality names in the industrial sector, but with the stock underperforming the S&P 500 by around 7.7% year to date, there is a sense that the market is losing a little patience with Danaher. In addition, the company is facing a significant amount of unpredictability about its future prospects -- an unusual situation for Danaher. It's time to look at three reasons Danaher could fall in 2014.

Temporary or structural weakness?
Danaher's second-quarter results disappointed the market, and Fools already know that it was mainly due to softness in two product lines. Communications (the test and measurement segment) and dental consumables both disappointed in the quarter, and Danaher CEO Larry Culp said he expected "negative growth" for the communications platform for the rest of the year. Fools can read about the other main conclusions from the conference call here.

While there's a case to be made for a bounce-back in both of these product lines in future quarters, the following chart of segmental sales reveals that these problems may be something structural.

Source: Danaher Corporation presentations.

Clearly, the dental and test and measurement segments haven't grown over the past three years, and it's not clear whether the current weakness is merely part of a deteriorating end market.

Emerging markets could disappoint
The company has been actively engaging in investing in emerging markets, or what Danaher's management calls "high-growth" markets. Indeed, at the end of 2013, high-growth markets made up more than 25% of its revenue, and international revenue made up 58% of Danaher's 2013 total revenue.

Moreover, Danaher is becoming increasingly reliant on these markets for growth. For example, in the second quarter, Beckman Coulter, the company's life sciences and diagnostics segment, generated "mid-teens growth in China, while the developed markets grew at a low-single-digit rate," according to Culp. Fools need only to look at the preceding chart to see the importance of the life sciences and diagnostics segment. The point here is that GDP growth estimates for countries such as Brazil, India, and China have been coming down this year, and this could put pressure on Danaher in future quarters. Given its exposure to emerging markets for growth, this is something to worry about.

The market might fall out of love with Danaher Corporation
Some companies -- by way of their management, history, or other factors -- acquire a certain reputation. It's fair to say that Danaher is known for being a highly cash-generative company that uses its cash to make earnings-enhancing acquisitions. The acquisitions then enter into the Danaher Business System, or DBS, and, just as with Beckman Coulter, management goes about improving operational performance. That's why the market loves Danaher. Indeed, Larry Culp reaffirmed that it had $8 billion worth of firepower to make acquisitions.

Unfortunately, it's been a couple of years since Danaher made an acquisition worth $500 million, although it has made a number of small deals recently. The intended acquisition of Siemens' clinical microbiology business (possibly for a figure in the $500 million range) is a step in the right direction, but with equity markets rising, Danaher may find it hard to make the more significant purchases at attractive prices.

All of this is not a problem in itself. After all, what's wrong with walking away from deals that aren't a good value? However, if the company loses its reputation for being a deal-maker, then the market's sentiment could turn negative. Danaher is not a company that investors buy for its 0.5% dividend yield; they buy it for its management's ability to apply the DBS to new businesses. If its management loses the reputation of being able to do that, then the stock could suffer a negative rerating.

The bottom line
All told, Danaher has some uncertainty surrounding it this year. It's not clear that the dental and test and measurement segments aren't in some kind of structural decline. Moreover, relying on emerging markets for growth in 2014 could prove a disappointment, and the company is under pressure to deliver on its acquisition strategy. Much to think about.

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