Mixed bag for smartphone makers

The media just can’t get enough of smartphone makers recently. This past week was no exception, for two completely different reasons.

First, the good news: Apple announced Monday it sold over 9 million of its recently launched 5S and 5C iPhones during their first weekend of sales, far exceeding Wall Street expectations as analysts were on average looking for sales around 5 million. Shares rallied on the news, but pulled back a bit throughout the rest of the week.

Read: BlackBerry revenue declines 45% in Q2

The bad news relates to Blackberry: the company reported horrible results, as expected. But it also announced it had signed a letter of intent to be bought by a consortium of investors led by Fairfax Financial, subject to further due diligence for US$9.00 per share. Admittedly, this could actually be good news by taking this company out of the spotlight so it can focus on rebuilding, but it is truly sad to see another Canadian company fall by the wayside in such dramatic style.

Apple was not the only company to impress investors, as Nike reported very strong quarterly results on Thursday after market close, exceeding expectations. Shares rallied on Friday, extending the stock’s 40%+ rally so far in 2013. News was also positive out of Europe last weekend as Angela Merkel won the most seats in the German national elections. Unfortunately, one of her coalition partners did not manage to get the support it needed, so Merkel will have to forge a new coalition to maintain her position as Chancellor. However, markets are expecting a new coalition to form, maintaining the stability of Merkel as leader and stability of equity markets within the Eurozone—for now.

QUESTION OF THE WEEK

Considering that the Federal Reserve did not reduce its quantitative easing program, can we assume that October will be a good month for equity investors?

We can never guarantee investment gains so it might be more useful to rephrase the question: “What are the risks to equity gains for the coming month?” There are three to keep your eyes on:

• Tapering will happen eventually: The market has bought into this argument as well, considering it has been retreating ever since the initial jump following the Fed’s decision last week. The expectation of future tapering will always be a risk to short-term returns, although we think such a move is very positive for the long run as we try to get back to a “normal” economic environment.
• Earnings: We are just over a week away from the beginning of Q3 earnings season as Alcoa is expected to kick things off on October 8. Considering the impressive run U.S. equities have had thus far in 2013, it is fair to say the market is pricing in expectations for reasonably strong earnings growth. While current P/E ratios are not grossly expensive, they are not excessively cheap either. Therefore, investors will be expecting companies to meet consensus estimates to justify current trading levels. We would also keep our eyes on forward guidance as a sign of corporate confidence. We can only hope that guidance will exceed or meet expectations in the hope that business confidence is increasing, making CEOs more comfortable putting the billions of dollars of cash sitting on balance sheets to work in the U.S. and global economy.
• Washington: Let’s face it, we’ve been spoiled since the end of the sequestration debate at the beginning of the year as Republicans retreated to lick their wounds from the November 2012 elections. I say that because we barely heard a word out of Washington all year and when Washington is quiet, markets tend to rally. Just look at U.S. benchmark returns as proof. This has nothing to do with political ideology, but more to do with Congress creating unnecessary risk and volatility for political gain. Republicans are smelling Presidential weakness right now and are trying to capitalize by holding the debt ceiling debate hostage. We expect these shenanigans will only continue for the rest of the year, which means that markets may have to deal with further political disruptions.

Read:

U.S. 10 days from government shutdown

News outlets rapped over Fed taper data release

Gareth Watson is the Vice President, Investment Management & Research at Richardson GMP in Toronto. This team of research experts is responsible for monitoring and interpreting economic, geo-political situations, current market environments and trends. @Gareth_RGMP