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4 Things You Need to Know on Oct. 29

Yesterday's market moves
Dow Jones Industrial
Average (DJINDICES: ^DJI  ) : 15,569 (-0.01%); S&P 500: 1,762 (+0.13%)

After Wall Street's third straight positive week, you'd think investors were ready to start the new one by splurging on the most expensive Range Rover ever unveiled (massage seats and champagne cooler obviously included for a cool $225,000). But stocks got a case of the Mondays instead. While investors wait for the Federal Reserve's two-day policy-setting meeting to begin, the Dow dipped just more than a point Monday on some not-so-hot corporate earnings and mixed-up economic data.

1. "iPhailed to beat last year's earnings in the 3rd quarter"
That's what Apple (NASDAQ: AAPL  ) CEO Tim Cook could have said yesterday evening, when the titan of tech released its bushel of earnings to the public. The result? Earnings of $7.5 billion, or $8.26 per share, beat the Street's expectations, but nevertheless declined for the third straight quarter since maxing out at $17 billion at the end of 2012. Let that one sink in: Apple just finished nine straight months of declining profits.
But earnings still beat analyst estimates, so the stock should rise, right? Yet Apple traded flat yesterday and is up just 0.5% in premarket trading. It was Tim Cook's forecast for the company's fourth-quarter performance that freaked investors out. The holiday season has come to be measured by the number of iProducts mommy and daddy leave under the tree -- and it's historically Apple's most profitable quarter. Yet the gross profit margin, a crude measure of the amount of profit squeezed out of ever dollar of revenue, will shrink in the fourth quarter, according to the folks in Cupertino. In top of that, sales will barely rise.

But it can't be all bad. The bright spots included a 26% increase in iPhone sales from last year and higher Mac computer sales in the back-to-school season. But competition is fierce from the lower-priced Android products, especially from Samsung and its awkwardly aggressive ads. Apple's hope is that the new and slightly cheaper iPhone 5c (which comes in the colors of all your favorite bubble gums) will end up in the pockets of less affluent Asian consumers. But this goal seems a bit of a stretch, as the 5c still costs $550 here and even more abroad. Remember also that most foreign carriers won't offer the highly subsidized $100 price of Verizon and AT&T. It's time to ask the once-unthinkable question: Can Apple keep growing?

2. Merck earnings are sickly
Unfortunately, there's no prescription for a bad earnings report. Merck (NYSE: MRK  ) announced Monday that revenue fell 4% to $11 billion, just a pinch below the $11.12 billion analysts were expecting. But the real poison pill was that Merck execs narrowed EPS forecasts for full-year 2013 from a range of $3.45 to $3.55 to between $3.48 and $3.52. Investors basically told America's second-largest drugmaker to go home and chug some chicken noodle soup, sending the stock down 2.56% on Monday (we suggest shareholders take some Advil).

Merck's diagnosis? It's bleeding jobs. Earlier this month, Merck revealed that it's firing 8,500 of its 80,000 workers -- on top of the 7,500 job cuts it had already announced this fall. Like other drugmakers, Merck is also selling off its nonpharmaceutical businesses and giving its research and development department an injection to refocus on developing new medicines that drive revenue.

The two big problems for Merck last quarter were animals and diabetes. Merck's animal health brands suffered a 2% sales drop last quarter after the company stopped marketing its cattle weight-gain supplement Zilmax, which was making cows tired (just give your cattle some protein shakes if you want them to pack on the pounds). And sales of type-2 diabetes oral wonder-drug Januvia fell 5% from the prior-year quarter as competition from Bristol-Myers began to take up some more market share.

The takeaway is that the stock will be pressured by the multiple employee layoffs and slowdown in new medicines submitted for FDA approval. Jefferies and Bernstein Research each downgraded the stock earlier this month on worries about those issues. The question for investors is whether the new R&D focus will help the company improve sales expectations in 2014 -- because 2013 has been a lot of pain for the pharmaceutical company.

3. Burger King rises on "Satisfries"
Burger King (NYSE: BKW  ) fries got a facelift by Silicon Valley's top Doc. Salted and crinkled to perfection, the tasty new "Satisfry" french fry could be a game-changer for Burger Kind Worldwide, which earned surprising profits in the third quarter.

Burger King stock stock rose 5.8% Monday on news of the $68 million profit. Following a recent trend in fast food, Burger King lowered costs by a whopping 90% by selling many of its restaurants to franchisees. Last year the company owned 595 restaurants, but after selling a boat load of them to franchise owners, the corporation owns just 74. The smaller, more nimble balance sheet put up respectable profits that impressed Wall Street. Sales in Asia-Pacific restaurants existing for more than 18 months rose almost 4%. The Asian market is important for fast food... because there are a lot of hungry people in Asia.

The New York Post must be all over this... The 73-year old McDonald's showed us that it can still act like a 15-year old -- the Burger King competitor announced that it's ending its relationship with the iconic Heinz Ketchup brand, which has been sitting in MCD ketchup caddies for 40 years. All because Heinz, under its new private-equity ownership, hired a former Burger Kind CEO (Wash Post) and current board member to lead the company. The $96 billion McDonald's made a highly relevant business decision based on hurt feelings. All in all, Burger King looks totally cooler in Monday's news.

4. Shutdown-delayed industrial-production numbers impress
Here's the good news: U.S. industrial production surged 0.6% in September, topping economists' 0.4% expectations and August's 0.4% gain. The monthly report covers the business output from the manufacturing, electric, mining, and gas sectors, but it was one of the lonely economic reports delayed last month because of the government shutdown.

What's behind the big numbers?
Production at mines and utility factories popped more than 2%, while manufacturing inched up by 0.1%. That was enough to outweigh some of the disappointments: Car sales slowed (we're waiting until the Tesla is a tad cheaper), and furniture output took a hit.

The takeaway is that the industrial-production figures don't take into account the impact of the government shutdown; other delayed economic reports have. Pending home sales dropped for the fourth straight month, according to another report on Monday, and the September nonfarm payrolls report and durable-good orders both showed a notable slowdown. So investors are taking the solid industrial-production numbers with a grain of salt big enough to meet the Satisfries' sodium quota.

In the markets Tuesday:

Originally published on

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