Financial Review

Earning Season and Crazy Season

…Earnings continue to pour in hot. Comcast passes on 21st Century Fox. Trade war tensions. Trump influences Fed. Invites Putin to White House.

Financial Review by Sinclair Noe for 07-19-2018

DOW – 134 = 25,064
SPX – 11 = 2804
NAS – 29 = 7825
RUT + 9 = 1701
10 Y – .03 = 2.84%
OIL + .68 = 69.44
GOLD – 4.80 = 1223.30

The Dow snapped a five-session win streak. The earnings season continued at full speed, driving individual stock moves. Nearly 14% of S&P 500 companies have reported thus far this season, according to FactSet, with profits up more than 20% and sales growing about 8.4%.

 

After the closing bell, Microsoft reported better-than-expected earnings for the fourth quarter of its 2018 fiscal year, which ended on June 30. Earnings topped estimates by 5 cents per share. Microsoft grew revenue by 17 percent, also topping estimates. In recent years CEO Satya Nadella has focused investor attention around the Commercial Cloud, a group of products including commercial tiers of the Office 365 productivity software, Dynamics 365 business software and the Azure public cloud. Commercial Cloud brought Microsoft $6.9 billion in revenue, up 53 percent. That’s down sequentially from about 58 percent growth, but still substantial. Microsoft, as usual, did not disclose exact revenue from Azure, but did say that it rose by 89 percent.

 

Shares of eBay fell over 10 percent after the company reported sluggish growth in its marketplace business and lowered its revenue forecast for the rest of the year. eBay reported second-quarter earnings of 53 cents per share, while revenue came in at $10 billion. While the earnings were 2 cents per share above estimates, eBay’s revenue came in $50 million short of expectations. In addition, eBay adjusted its full-year revenue forecast, lowering its estimate to a range of $10.75 billion to $10.85 billion from its previous estimate of $10.9 billion to $11.1 billion. The 10 percent drop was the worst single day of trading for eBay’s stock in nearly two years.

 

Shares of footwear maker Skechers tumbled more than 20 percent in aftermarket trading after the company reported disappointing quarterly results and forecast a weak outlook for the third quarter.

 

Travelers Companies fell 3.7% after the insurer reported second-quarter earnings that missed expectations.

 

IBM rose 3.3% after earnings topped Wall Street estimates.

 

Philip Morris lost 1.5% after it gave a full-year profit outlook that was below analyst expectations. The tobacco company has slumped about 25% thus far this year.

 

Domino’s Pizza reported second-quarter revenue and same-store sales that missed expectations. Nevertheless, Domino’s has been a strong performer in 2018, up nearly 50% since the start of the year. Domino’s down 2.4%

 

Bank of New York Mellon reported second-quarter earnings that were slightly ahead of expectations, and revenue that met forecasts. Shares dropped 5%.

 

On Friday, General Electric, Honeywell, VF Corp., Kansas City Southern, and Schlumberger among the notable S&P 500 members set to report earnings before the market open.

 

Comcast, the largest cable company in the US, has abandoned the bidding war for assets of 21st Century Fox, Rupert Murdoch’s media empire, conceding to Disney today after a single round of bidding. And while Comcast has dropped out of the bidding, they did manage to drive up the price competitor Disney would have to pay for the company. Disney originally planned to pay $52.4 billion in stock for Fox’s assets but upped the offer to about $71 billion in cash and stock after Comcast made a surprise bid. With Comcast out of the running, Disney and Fox shareholders will almost certainly approve the deal during the vote on July 27. Disney will be acquiring Fox’s franchises like The Simpsons and X-Men, its movie and TV studios, cable networks like FX and National Geographic, its stake in Hulu, and its international distributors like Star India. Comcast said it is now setting its sights firmly on satellite service Sky, which it has also been competing with Fox to acquire in the UK. Comcast was up 2.5%. Disney gained 1.3%.

 

Yesterday we told you the European Commission was fining Google $5 billion for antitrust violations. the EU concluded a multiyear investigation and announced that it would punish Google for trying to bundle its own apps with its Android operating system. Basically, the EU argues that Google forced phone makers to preinstall its Search and Browser apps onto Android phones, giving its products an unfair advantage over those of competitors. It’s the second multibillion-dollar antitrust-related fine the EU has hit Google with this year. Today, Trump tweeted that this penalty was yet another sign of the EU’s abuse of the US — an argument he’s increasingly stressed in recent days as he makes the case for imposing potential auto tariffs on the longtime American ally.

 

Officials from the EU Trade Commission are said to be preparing a list of tit-for-tat trade actions in response to proposed US tariffs on EU cars ahead of next week’s talks in Washington. Automakers said tariffs on US cars and car parts could raise vehicle prices by $83 billion annually. Ford Motor dropped 0.5% and General Motors fell 1%. Auto industry executives, testifying at the first of a two-day hearing being held by the U.S. Commerce Department, warned against the tariffs. The administration has justified raising the tax penalties by invoking Section 232 of the Trade Expansion Act of 1962, which gives the administration the ability to investigate the potential effect of imports on national security and curb those that pose a threat. German carmakers are in favor of abolishing tariffs affecting their industry but an escalating trade war might call their future investments in the United States into question. The head of the German Association of the Automotive Industry, testifying before the Commerce Department, said escalating tariffs, not cheap imports were the real risk to U.S. national security.

 

Federal Reserve Chairman Jerome Powell, questioned by members of a House congressional committee, repeated on Wednesday said that rising world protectionism would over time pose a risk to a U.S. and global expansion that appears largely on track to continue. Powell said: “If this process leads to a world of higher tariffs on a wide range of goods and services that are traded and those are sustained for a longer period of time, if it results in a more protectionist world, that would be bad for our economy,” Powell told the House Financial Services Committee. “It isn’t up to us to criticize policies. But the evidence is clear that countries that remain open to trade have higher productivity. They have higher incomes.”

 

Trump criticized the Federal Reserve’s interest-rate increases, breaking with more than two decades of White House tradition of avoiding comments on monetary policy out of respect for the independence of the U.S. central bank. Maybe someone should tell him that the only reason you would not normalize rates is if the economy is too weak to handle rate hikes. And then White House staff had to issue a clarification that Trump was not interfering with Fed policy decisions. Except, the statement constitutes interference. The dollar index was lower on the day, erasing a gain that had taken it to a fresh one-year high of 95.65. The dollar has been rising this week following comments from Fed Chairman Jerome Powell that the economy was strong, and the Fed would keep raising rates. The 2-year Treasury was at 2.58 percent, slightly lower than where it was when Trump made the comment, but it was well off its high of the day, 2.63, a 10-year high. The 10-year yield dipped temporarily to 2.83 percent after the interview and was trading at 2.84 percent.

 

Homeland Security Secretary Kirstjen Nielsen said the United States needed to be prepared for an attempt by Russia to interfere in elections in all 50 U.S. states this year, adding that there was no question Moscow interfered in the 2016 U.S. presidential contest. Meanwhile, Trump invited Russsian President Putin to visit the White House in the fall. Maybe in early November; they could watch the election results together.

 

And a tip of the hat to Montenegro. Little-known Montenegro — which Trump attacked as “aggressive” enough to lead the NATO alliance into war — is one of Europe’s smallest countries with an army of under 2,000. So, Montenegro offered a spot-on response: “In today’s world, it does not matter how big or small you are, but to what extent you cherish the values of freedom, solidarity and democracy. Therefore, the friendship and the alliance of Montenegro and the United States of America is strong and permanent.”

 

The Conference Board’s leading economic index rose 0.5% after no gain in May. A measure of current conditions — or how the economy is doing right now — climbed 0.3%. A “lagging” index that looks back at the past several months advanced 0.3%. Most of the segments of the economy covered by the leading index showed greater strength in June with the lone exception of housing. Higher interest rates, a shortage of construction workers and rising costs of supplies such as lumber might be starting to curb work on new homes.

 

Initial jobless claims, a proxy for layoffs in the U.S., sank in mid-July to the lowest level since the end of 1969. New claims dropped by 8,000 to 207,000 in the seven days ended July 14.

 

Arizona’s seasonally adjusted unemployment rate was unchanged from 4.7% in May to 4.7% in June. The national unemployment rate increased to 4.0% in June. A year ago, the Arizona seasonally adjusted rate was 4.8%. Arizona lost 44,900 Nonfarm jobs in June, with the private sector losing 4,800 of those jobs. Arizona Nonfarm employment grew by 2.6% (70,700 jobs) over the year in June.

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