Three events dominated the investment world this week: (1) the Federal Reserve’s latest meeting, (2) the initial public offering of Alibaba and (3) Scotland‘s vote on whether to secede from the United Kingdom.
The Fed said it will continue its economic-stimulus, easy-money program even as it moves gradually toward winding it down. As expected, the Fed will end its quantitative easing program in October, when it buys $15 billion of Treasury and mortgage-backed securities. But the Fed also continued to say that “it will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends.” Supporting that statement, inflation continues to run below the Fed’s 2% goal. The consumer price index was up just 1.7% in the 12 months through August.
Fed chairwoman Janet Yellen said that the “considerable time” pledge is highly conditional and depends on future readings of economic data. The Fed acknowledged that the economy continues to improve. But Yellen added: "There are still too many people who want jobs but cannot find them, too many who are working part time but would prefer full-time work, and too many who are not searching for a job but would be if the labor market were stronger."
What’s more, the Fed lowered its projections for economic growth yet again, just as it has in the five previous years of the current economic recovery. The Fed now says it expects the economy to grow 2%-2.2% in 2014, 2.6%-3% in 2015, 2.6%- 2.9% in 2016 and 2.3%-2.5% in 2017. The projections were reduced from the previous ones in June.
Also this week, the U.S. Labor Dept. said that the number of new applications for unemployment benefits dropped last week to the second-lowest level in 14 years. Initial claims fell by 36,000 to a seasonally adjusted 280,000. The four-week moving average of claims! fell to 299,500, a new seven-year low. And the number of people continuing to draw unemployment benefits declined by 63,000 to 2,429,000 for the week ended Sept. 6, a new post-recession low.
Company layoffs have dropped because the economy is growing. But hiring hasn’t been robust enough to return employment to levels seen during previous economic expansions. Most Fed officials continue to expect the central bank to first increase its key short-term interest rate, now at zero-0.25%, sometime next year. As a group, they now project the fed funds rate to be at 1.25%-1.5% in late 2015 and 2.75%-3% in late 2016. These numbers are higher than previous projections.
Top High Tech Companies To Buy Right Now
The Alibaba Frenzy
Today’s initial public offering by Alibaba Group Holding Ltd. (NYSE: BABA) was priced at $68 per share, giving the company an initial market value of $168 billion. This put Alibaba among the 40 biggest public companies worldwide, and third in value among Internet companies after Google and Facebook.
The IPO demonstrates the increasing importance of Asia. Four of the world’s 10 largest publicly traded Internet companies are based there. Alibaba, Tencent Holdings, Baidu and JD.com are worth about $430 billion. The four biggest U.S.-based Internet companies—Google, Facebook, Amazon and eBay—have a combined value of about $800 billion.
Because of strong investor demand, Alibaba shares were expected to jump, at least initially. But an unusual feature of this IPO is that some longtime investors who collectively hold more than $8 billion of Alibaba shares can sell at any time. They’re not subject to a “lockup,” the typical arrangement that restricts stock sales for specified time periods following an IPO.
Alibaba is China‘s largest e-commerce company. An estimated 45% of the world’s supposedly 3 b! illion In! ternet users are in Asia. In China alone, more than 500 million people go online using smartphones. The number of users in Asia is expected to approach 1 billion by year-end, almost five times the total in North America, says research firm Webcertain Group Ltd.
Like Amazon, Alibaba gets most of its revenue from online sales, handling 80% of China‘s e-commerce. Alibaba.com connects Chinese manufacturers with small businesses. Taobao, Alibaba’s consumer-to-consumer platform similar to eBay, offers a virtual marketplace. Tmall, its business-to-consumer platform, provides a virtual shopping center giving international companies access to Chinese buyers. Alipay, its online payment processor (similar to eBay's PayPal), guarantees every transaction.
In 2013, Alibaba had annual revenue of $8.5 billion on $300 billion worth of goods sold. Second-quarter 2014 revenues grew 46% year over year, primarily because of strong sales growth through mobile devices. The company views international expansion, including in the US, as a major future growth area.
Scotland Says No
Yesterday, voters in Scotland decisively chose to stay in the United Kingdom. Despite polls suggesting a close vote, 55% voted no in the referendum over whether to break up the 307-year union. It was clear that Scotland‘s economy would suffer if its voters chose independence, with many political complications for the UK and likely continued weakness for its financial and currency markets. Before the vote, nervous investors had voted by selling UK-listed investments. IShares MSCI United Kingdom, the largest UK-related exchange-traded fund, had declined as much as 6.5%.
The referendum’s outcome undoubtedly stemmed partly from significant concessions made by the British government concerning Scotland‘s self rule, including new powers of taxation and spending.
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