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Tuesday July 26, 2016



Netflix's Membership Growth Slows

Netflix, Inc. (NFLX) announced its second quarter results on Monday, July 18. Low membership additions overshadowed the video-streaming company's better-than-expected earnings.

The company reported that revenue during the quarter rose 31% to $2.1 billion. This was in line with expectations of $2.11 billion.

In a letter to shareholders, the company stated: "While we did not grow as fast as forecast in Q2, we are optimistic about the future owing to our singular focus, global scale and the growth of Internet TV viewing. We are in the very early days of the shift from linear television to on-demand viewing and there are nearly 1 billion pay TV subscribers worldwide who will migrate to Internet TV over the coming decades."

Netflix reported earnings per share during the quarter of $0.09. This was better than previously released guidance and estimates of $0.02 per share.

Despite Netflix's strong earnings report, the low membership growth concerned analysts and investors. Netflix reported that domestic membership growth was only 160,000, far less than the projected 509,000. Netflix reported sluggish international growth, with 1.52 million new members compared to an expected 2.15 million. While many analysts remain optimistic regarding Netflix, they will be keeping an eye on the company's slowing growth numbers.

Netflix, Inc. (NFLX) shares ended the week at $85.89, down 13% for the week.

Lockheed Martin's Earnings Take Off

Lockheed Martin (LMT) announced its second quarter earnings on Tuesday, July 19. The aerospace and defense company's earnings surpassed pre-release estimates.

The company reported that net sales during the quarter rose 11% to $12.9 billion. Estimates were for net sales of $12.56 billion.

"The Corporation achieved exceptional operational and financial results in the second quarter," said Lockheed Martin Chairman, President and CEO Marillyn Hewson. "Our strong performance enabled us to increase our financial guidance for sales, profit, earnings per share and cash from operations, and positions the company to deliver more value to our customers and shareholders."

Lockheed Martin's profit rose 13% to $3.32 per share. This was significantly higher than expectations of $2.93 per share.

In addition to reporting strong earnings for the second quarter, Lockheed Martin raised its financial guidance for the rest of the year. Revenue is now expected to be between $50 billion and $51.5 billion while earnings per share is expected to be 6% higher than previously estimated at $12.30 per share. So far this year, the company's share price has risen 21%.

Lockheed Martin (LMT) shares ended the week at $257.31, relatively unchanged for the week.

Johnson & Johnson's Earnings Top Estimates

Johnson & Johnson (JNJ) announced its second quarter results on Tuesday, July 19. The medical device and pharmaceuticals company's results topped Wall Street estimates.

The company reported that sales during the quarter increased 3.9% to $18.5 billion. This was higher than the consensus forecast of $18 billion.

"We continue to see good momentum through the first half of 2016, delivering solid results in the second quarter, supported by strong underlying growth across our enterprise," said Johnson & Johnson Chairman and CEO Alex Gorsky. "We saw notable strength in our Pharmaceuticals business due to the continued success of new products, and also achieved significant clinical milestones, advancing our robust pipeline."

Net earnings came in lower than the same period last year at $4 billion. On an adjusted earnings per share basis, Johnson & Johnson reported a profit of $1.74 per share, higher than the expected $1.68 per share.

The day before the second quarter earnings release, Johnson & Johnson finalized its $3.3 billion acquisition of beauty products company Vogue International. The company also raised its full-year financial guidance with projected sales of $71.5 billion to $72.2 billion and earnings of $6.63 to $6.73 per share. This was welcome news for investors and analysts who closely follow the Fortune 500 company.

Johnson & Johnson (JNJ) shares ended the week at $125.03, up 2% for the week.

The Dow started the week of 7/18 at 18,522 and closed at 18,571 on 7/22. The S&P 500 started the week at 2,162 and closed at 2,175. The NASDAQ started the week at 5,035 and closed at 5,100.

Treasury Yields Settling Into New Range

Treasury bond yields continued to fluctuate during the week of July 18 as concerns regarding the economic impact of the United Kingdom's decision to leave the European Union (known as "Brexit") lessened. Yields have settled into a narrow post-Brexit range as traders await news from the Federal Reserve's next policy meeting on July 26-27.

The benchmark 10-year note yield started the week at 1.59%, fell to 1.56% by the end of Thursday's trading session, and then rose during early Friday trading to 1.58%. This see-saw has been consistent over the past couple weeks, albeit within a narrow range of 1.43% to 1.60%.

Abroad in Europe, European Central Bank President Mario Draghi intimated there is no imminent plan to further lower interest rates in order to stimulate struggling European economies. Many European bonds are currently offering negative rates with the German 10-year bond last trading at negative 0.066%.

Although the probability of an interest rate hike in the U.S. remains low, the odds of Federal Reserve action have risen. Fed funds futures, used by some traders to make bets on future Fed policy, show a 50% chance of a rate hike by December. Just two weeks ago the odds of an interest rate hike by the end of the year were 24%.

As of now, it looks like U.S. Treasury bonds will remain relatively stable until next week's Fed policy meeting. That meeting should give traders a clearer picture of what direction the Fed sees the global economy taking.

"Though the Fed's tightening or loosening of monetary conditions is fairly significant for risk appetite, it's unlikely that this will be a meeting where the Fed tries to really tighten markets," said Aaron Kohli, interest-rate strategist at BMO Capital Markets. "Though the Fed likely feels the probabilities [of a rate hike] should be higher, there is no urgent reason to jawbone them higher till the fuller effects of Brexit are understood."

The 10-year Treasury note yield finished the week of 7/18 at 1.57%, while the 30-year Treasury note yield was 2.29%.

Mortgage Rates Edge Upwards

Freddie Mac released its latest Primary Mortgage Market Survey (PMMS) on Thursday, July 21. The report revealed interest rates edging upwards from last week. Rates still remain near record lows, which should encourage potential home buyers.

The 30-year fixed rate mortgage averaged 3.45% this week. This represents an increase from last week when it averaged 3.42%. Last year at this time, the 30-year fixed rate mortgage averaged 4.04%.

This week, the 15-year fixed rate mortgage averaged 2.75%. This was up from last week when it averaged 2.72%. The 15-year fixed rate mortgage averaged 3.21% one year ago.

"Post-Brexit volatility tapered off over the last two weeks, allowing interest rates to bounce back a bit from their record (10-year Treasury yield) and near-record (30-year mortgage rate) lows," said Sean Becketti, Chief Economist at Freddie Mac. "This week, the 30-year fixed mortgage rate increased 3 basis points to a still-quite-low 3.45%. With the Federal Reserve on hold and the UK monetary authority taking at least a one-month breather, we don't expect any significant movement in mortgage rates in the near-term. This summer remains an auspicious time to buy a home or to refinance an existing mortgage."

Based on published national averages, the money market account finished the week of 7/18 at 0.54%. The 1-year CD finished at 1.11%.

Published July 22, 2016
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