Taper time at the Fed

With many of the world’s central banks already making interest rate announcements earlier this month, it will now be the turn of the Federal Reserve’s Federal Open Markets Committee, which will meet next Tuesday and Wednesday and make an interest rate announcement on Wednesday afternoon.

The announcement is a foregone conclusion as rates will stay at 0.25%, but the investment world will also be waiting for comments from Ben Bernanke concerning the ‘tapering’ of bond purchases. The general consensus is that there will be a small reduction in purchases as the Fed attempts to slowly withdraw its purchase program.

Read: Rising interest rates won’t derail U.S. recovery

The central bank will likely dominate the news headlines; however, large-cap names such as FedEx Corp and Oracle will report quarterly earnings while earnings news of out Canada will be extremely quiet.

Looking at economic data, housing and inflation will be the two key themes over the next five trading days as we’ll see multiple housing statistics released in the U.S. and inflation reports on both sides of the border. Commodity traders will continue to keep their eyes on Syria, particularly oil and gold traders, but if diplomacy continues to put a military strike on the back burner you could see some commodity prices pull back along with the Canadian dollar.

QUESTION OF THE WEEK

This week Apple made a number of announcements, yet analysts seem to be as divided as ever on the largest market cap name in the S&P 500. Do we buy Apple or simply stay away?

It’s a stock of two stories. The first Apple is one that sells products and requires innovation to compete, while the second is a company that is considered cheap when compared to its industry peers. In other words, the two stories are about growth and value.

Let’s examine the growth story. While doing so we must remember that all products have a life cycle that begins with introduction and growth, then moving into maturity and finishing with decline, until innovation reveals a new product to take its place. Apple has been very good at delivering products people want, but in certain regions of the world some of those products have reached the maturity phase, so you’re unlikely to see significant growth numbers in the future unless new and better products are brought to market.

Read: Will wearable mobile devices catch on?

Recent criticism of Apple, including this week’s launch of the iPhone 5S and 5C, suggests the market is not impressed with the newer devices and that the company is not as innovative as it used to be. At the same time, it’s also fair to ask what more we really want to do with our smartphones and whether competitors such as Samsung will soon face the same problems.

For investors focusing on growth, Apple is currently not at the top of their buy lists. As for the value investors, they see a company that could recapitalize further and create more value for shareholders through share buybacks and dividend increases. Didn’t Apple already do this earlier in the year? It did, but investors such as Carl Icahn argue the company didn’t go far enough and that there’s much more value to be realized from the balance sheet.

Then again, it’s also fair to argue that other companies have had lots of recapitalization opportunities in the past only to see share prices fall as cash balances declined. Regardless, the value investor is likely taking a good look at Apple this week, especially after the stock fell about US$40 per share.

Read: Charles Brandes’ picks for value investors

These two stories have been battling each other all year and they explain the stock’s performance – growth investors were winning the argument since January until the value investors and Carl Icahn reversed the negative sentiment in July. Is Apple the right stock for all investors? No. The growth investor will likely stay away until the firm reveals “the next best thing,” but value investors will likely have Apple on their radar screens and might consider further weakness as a buying opportunity.

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