Market Digest – Week Ending 10/16
Stocks rose modestly on belief that the Fed is less likely to raise rates in 2015. The week featured little economic news, but two monster acquisitions. On Monday, Dell agreed to buy EMC for $67 billion, in what has been called the largest tech deal in history. On Tuesday, AB InBev reached agreement to buy SABMiller for $104 billion. Combined, the companies sell roughly a third of all beer in the world. Earnings were mixed. Financials giants Citigroup, Wells Fargo and Bank of America exceeded expectations, while JP Morgan did not. GE also beat, while Netflix disappointed in terms of US subscriber growth.
S&P 500: 2,033 (+0.9%)
FTSE All-World ex-US: (+0.6%)
US 10 Year Treasury Yield: 2.03% (-0.07%)
Gold: $1,177 (+1.8%)
USD/EUR: $1.135 (-0.0%)
• Monday – Dell announced an agreement to buy EMC for $67 billion.
• Monday – Twitter announced it will cut 300 jobs, or 8% of its workforce. Shares fell.
• Tuesday – Russia increased its offensive in Syria, doubling daily airstrikes against anti-government forces to 55.
• Wednesday – The 10 year Treasury yield dipped below 2%, though it would rise above later in the week.
• Wednesday – Fed governor Daniel Tarullo said he does not believe it would be appropriate to raise rates this year.
• Wednesday – FedEx cut its yearly earnings outlook blaming soft demand for freight services.
• Thursday – President Obama said he was dropping plans to withdraw almost all troops from Afghanistan, reversing his intention to exit the conflict during his administration.
• Friday – Nevada ruled daily fantasy sports sites must shut down without a gaming license.
Twitter’s layoff announcement may mark a turning point in San Francisco’s tech-driven economy. 300 people is not a lot in a city of almost a million, but the move is indicative of a slowly changing focus to actual profitability. In recent years, venture capital and private equity funding has been relatively easy to come by. This has led to a slew of startups offering everything from food delivery to low cost car insurance for those who don’t drive much. Some of these businesses will make money but many won’t. Last month, New York based Quirky filed for bankruptcy after raising $185 million from investors.
Stock market volatility in August has calmed considerably, but the shakeup may have been enough for some venture capitalists to want to take a pause. For some companies, if they are losing money and can’t get the next round of funding, they will fold or at least be forced to downsize. Right now, the labor market for software engineers can only be described as extremely competitive. The result has been a boom in real estate rental costs and home values. Costs for housing in San Francisco average roughly 50% of income, compared to about 30% in the rest of the country – and this includes already high income levels.
The tech world has always been cyclical and if the party slows down soon in the Bay Area, it would be nothing new. What is a little different this time is that more of the tech world has migrated up the 101 freeway from the peninsula to the city itself. Perhaps ironically, Twitter was one of the first big name companies to spark this trend. As always, it will be interesting.
Craig Birk, CFP®
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