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Friday April 29, 2016



Alphabet Posts Mixed Results, Stock Tumbles

Alphabet Inc. (GOOGL), Google's parent company, announced its first quarter earnings on Thursday, April 21. The tech giant disappointed investors with results well below analysts' projections, causing the stock to fall more than 5% in after-hours trading.

Despite missing earnings expectations, Alphabet's revenue increased by 17% compared to the same quarter last year. For the first quarter last year, Alphabet reported $17.26 billion in revenue, while this year revenue increased to $20.26 billion.

"Our Q1 results represent a tremendous start to the year with 17% revenue growth year on year and 23% growth on a constant currency basis," said Ruth Porat, CFO of Alphabet. "We're thoughtfully pursuing big bets and building exciting new technologies, in Google and our Other Bets, that position us well for long term growth."

The Silicon Valley company announced net income was $4.2 billion for the quarter, or $7.50 a share. This was $0.46 below analysts' expectations of $7.96 a share.

Alphabet fell short of estimates mainly because of the amount of funds it spent to increase traffic for its mobile advertising services. Traffic acquisition costs for the quarter were $3.8 billion and made up 21% of total ad revenue. Google continues to focus more of its attention on its mobile business, acknowledging the shift to mobile and its growing importance in driving up advertising revenue.

Alphabet Inc. (GOOGL) shares ended the week at $737.77, down 5.4% for the week.

Coke's Soda Business Loses its Fizz

Coca-Cola Co. (KO) reported quarterly earnings on Wednesday, April 20. The company's classic soda brands, like Coke and Diet-Coke, fell behind in consumption while the other beverage segments grew 7%.

Coke's first quarter revenue missed expectations and fell to $10.28 billion. Last year at this time, the beverage company reported revenue of $10.71 billion.

"Amidst a challenging global macro environment, the continued focus on our five strategic initiatives enabled us to gain global value share in the first quarter and deliver positive top-line growth and strong underlying margin expansion," said Coke CEO Muhtar Kent. "Our operating results are driven by our commitment to sustainable growth, and we are confident that we have the right strategies in place to achieve our full-year outlook and drive long-term value for our system and shareowners."

Net earnings for the first quarter were $1.48 billion. This was a drop from earnings of $1.56 billion during the first quarter last year.

Coke continues to witness consumers shift away from fizzy soda beverages toward bottled water, sports drinks and ready-to-drink tea. Coke has adjusted its strategy and is diversifying its portfolio in response to changing tastes. In addition to focusing on the non-carbonated beverage market, Coke has introduced a variety of new sizes, including "portion-controlled" 7.5-ounce mini-cans. The shift to small seems to be capturing consumers' taste buds. While the traditional 12-ounce cans and 2-liter bottles' sales dropped 2% last year, the alternative-package sizes increased sales by 15%.

Coca-Cola Co. (KO) shares ended the week at $44.54, down 3.4% for the week.

Netflix's Second Quarter Projections Disappoint

Netflix, Inc. (NFLX) released its first quarter earnings on Monday, April 18. The company disappointed investors with its projections for second quarter international growth, causing shares to drop 12% in after-hours trading following Monday's earnings release.

Netflix reported first quarter revenue of $1.96 billion, down from last year's first quarter revenue of $1.57 billion. This was slightly below analysts' revenue expectations of $1.97 billion.

"We are off to a great start in 2016, expanding the Netflix service to 130 new countries in January and finishing Q1 with over 81 million members on the strength of our fast growing slate of original content," said Netflix CEO Reed Hastings in a letter to shareholders. Hastings went on to explain that the company is backing away from its second quarter international growth projections and pointed to its Australia/New Zealand launch as one reason for the decline. He also blamed "standard seasonality and our launch in 130 countries at the very beginning of Q1 (so Q1 captured the initial surge of sign-ups)" for the international slow down.

Netflix reported that net income rose to $27.65 million from $23.70 million last year. The company posted earnings per share of $0.06.

Next month, Netflix plans to increase its most popular subscription plan by $2, upping the monthly price to $9.99. The change could affect as many as 17 million subscribers, according to USB investment bank. Hastings does not expect the change to dramatically impact Netflix's numbers, stating that, "We expect only modestly increased churn from un-grandfathering, partially because these members have been with us for a reasonable period already, and because our content continues to improve." Hastings noted that performance in the quarter benefited from the launch of several series, including Making a Murderer, Fuller House, House of Cards season 4 and Daredevil season 2.

Netflix, Inc. (NFLX) shares ended the week at $95.90, down 12.7% for the week.

The Dow started the week of 4/18 at 17,890 and closed at 18,004 on 4/22. The S&P 500 started the week at 2,079 and closed at 2,092. The NASDAQ started the week at 4,919 and closed at 4,906.

Yields Reach Three-Week High

Demand for U.S. government bonds dropped this week amid increasing investor confidence in the global economy. The sell-off in U.S. bonds saw the 10-year note yield reach its highest level in nearly three weeks.

Investor confidence in the global economy has grown in recent weeks, the result of the Federal Reserve's reluctance to raise rates combined with higher oil prices. Increased confidence is leading investors to shift capital away from government bonds and into riskier assets such as stocks, oil and junk bonds. The capital shift has seen the U.S. stock market come within all-time highs.

During early Friday trading on April 22, the yield on the 10-year note was 1.89% compared to a closing yield on Thursday of 1.88%. The closing yield last week was much lower at 1.75%. As yields rise, prices fall.

Many Treasury bond investors have found themselves scrambling in the current up-and-down yield environment. "As quickly as things fell apart to start the year which caused a significant and unexpected rally in Treasury bonds, things have reversed just as quickly which has caused the backup, particularly in safe haven bonds," said Larry Milstein, managing director of government-debt trading at R.W. Pressprich & Co.

Even though the Federal Reserve's next policy meeting is next week, most traders and analysts expect the Fed to stay silent regarding future interest rate increases. Many analysts believe the Fed's decision to raise interest rates last December for the first time since 2006 led to stock market turbulence earlier this year, a result that the Fed will be keen to avoid anytime soon.

The 10-year Treasury note yield finished the week of 4/18 at 1.89% while the 30-year Treasury note yield was 2.70%.

Interest Rates Remain Near 2016 Low

Freddie Mac released its latest Primary Mortgage Market Survey (PMMS) on Thursday, April 21. The report revealed interest rates remain largely unchanged and are still hovering near record lows for 2016.

The 30-year fixed rate mortgage averaged 3.59% this week. This represents a slight increase from last week when it averaged 3.58%. Last year at this time, the 30-year fixed rate mortgage averaged 3.65%.

This week, the 15-year fixed rate mortgage averaged 2.85%. This was somewhat lower than last week when it averaged 2.86%. The 15-year fixed rate mortgage averaged 2.92% one year ago.

"Volatility in financial markets subsided over the past week, allowing Treasury yields to stabilize. As a result, the 30-year mortgage rate was mostly flat, up only 1 basis point to 3.59%," said Sean Becketti, Chief Economist at Freddie Mac. "The release of March's existing-home sales report, which shows monthly growth at 5.1%, suggests homebuyers are taking advantage of low mortgage rates as the spring home buying season gets underway."

The money market fund finished the week of 4/18 at 0.3%. The 1-year CD finished at 0.5%.

Published April 22, 2016

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