Financial Review

Facebook Cracks

…Stocks rally on hope for trade agreement with EU. Facebook slammed on earnings. Tariffs hit multiple companies 2Q earnings. New home sales drop.

Financial Review by Sinclair Noe for 07-25-2018

DOW + 172 = 25,414
SPX + 25 = 2864
NAS + 91 = 7932
RUT + 5 = 1685
10 Y – .01 = 2.94%
OIL + .16 = 69.46
GOLD + 7.30 = 1232.40


Tech stocks lifted the S&P 500 and the Nasdaq. Microsoft rose 2.9 percent to a record and Apple up 0.4 percent, just shy of its all-time high. Alphabet moved higher again after a strong earnings report Monday afternoon. The S&P tech index was up 1 percent. Technology stocks are mostly responsible for the broader market erasing nearly all its losses from the early 2018 weakness that dragged U.S. stocks into a correction. A decline of at least 10% from a recent top is typically how market technicians define an asset’s bearish corrective phase. A climb from its closing low of at least 10% is generally viewed as an emergence from out of correction. The S&P 500 is now just a smidge above 10% higher than the Feb. 8 closing low of 2851, so we are out of correction territory – after 115 sessions in a correction – the longest streak since 1984.


Technology is relatively insulated from the trade war and that is, at least part of the reason why you see the sector do so well this year. For most of the session, the Dow was in the red, until the final half hour of trading.


Trump told reporters at the White House that his administration had agreed with the European Union to enter talks to eliminate most “non-auto” tariffs, including recent retaliatory measures. At a joint press conference in the White House Rose Garden with European Commission President Jean-Claude Juncker, Trump said they had agreed to work together toward achieving zero tariffs. Juncker said they also agreed to reassess existing tariffs on steel and aluminum.


Until a deal gets done, however, fears of increased costs and prices will linger. Tariffs have been mentioned in some form by more than 40 percent of the 146 S&P 500 companies that have already reported second-quarter earnings this season.


Although GM gets most of its steel for American-made vehicles from the U.S., global price increases sparked by Trump’s tariffs have been inescapable. Unlike GM, Fiat Chrysler has contracts in place to acquire steel at a fixed price through the rest of 2018. But the relief is probably limited. Commodity costs are likely to rise in 2019. Who will absorb the increase? The options are the automakers, their suppliers, consumers or a mix of the three. The estimated impact on vehicle prices of steel and aluminum tariffs have ranged from about $200 to $300. To be sure, that amount won’t hurt the industry too much. Automakers continue to profit as consumers abandon passenger cars in favor of more profitable SUVs, pickups and crossovers. The average transaction prices for a new vehicle in June was $35,511, up 2.1 percent from a year earlier. But potential price increases from Trump’s threatened vehicle tariffs would likely be much more damaging: about $5,000 per vehicle.


The rising cost of commodities – largely due to Trump’s 25 percent tariff on imported steel – took a bite out of General Motors during the second quarter. Although GM turned a $2.4 billion profit for the quarter, the company also reported $300 million in increased commodity costs. GM down 4.6%.


Ford reported a profit of $1 billion during the second quarter, down nearly 50 percent from the same period a year ago amid sluggish sales in China, the effects of the Trump administration’s tariffs and the costly disruption this spring of F-150 pickup production due to a fire at a supplier’s plant. It said the tariffs resulted in $145 million in higher costs and could rise to as much as $600 million for the full year. Ford dropped 0.5%.


Fiat Chrysler also cut its outlook for the year. Fiat reported that Q2 adjusted earnings before interest and tax fell 11%. Fiat also announced the death of Sergio Marchionne, who had stepped down as CEO over the weekend due to complications from surgery. Fiat shares dropped almost 12%.


The big earnings news today came after the closing bell. Facebook reported revenue hit $13.2 billion for the quarter, up 42% from the same period a year prior. But the figure fell short of Wall Street estimates, and Facebook said they expect the revenue slowdown to continue. The pressure is finally getting to Facebook, driving the stock down as much as 24% in after-hours trade. Facebook’s second quarter earnings results offer the clearest glimpse yet into how the Cambridge Analytica debacle impacted the business. News that the data firm accessed information from as many as 87 million Facebook users without their permission broke in the final weeks of the first quarter. CEO Mark Zuckerberg has said on past earnings calls that the company would take a hit as it pours money into content moderation in a massive hiring effort to control the flow of bad posts—among other investments—and shifting the News Feed to interactions with friends and family, versus posts from brands and organizations. In recent weeks, Facebook has faced increased scrutiny over its failure to eliminate misinformation and harmful content on its platform.


Facebook added 22 million daily active users globally during the quarter amid the onslaught of bad press, user outrage and regulatory scrutiny. However, the number of daily users in the United States and Canada remained flat compared to the previous quarter. In Europe, Facebook actually lost daily active users amid the rollout of sweeping new data protection regulations there. Facebook had 279 million daily users in the region in the second quarter, down from 282 million in the prior quarter.


Boeing, the biggest component in the Dow, fell 0.6%despite solid earnings and a boost to its revenue guidance. But the jet maker’s earnings forecast wasn’t as strong as investors were hoping for. Boeing also cut its profit margin outlook for its defense unit. Boeing’s stock is up more than 20% this year, so expectations were sky high. Boeing rival Northrop Grumman fell 6.5% despite earnings that topped estimates.


Better than expected profit from Coca-Cola was a bright spot. Coke’s stock rose nearly 2% thanks to solid sales of its iconic beverages, particularly the recently revamped Coca-Cola Zero Sugar. Coke said it would take the unusual step of raising prices on its carbonated sodas in the middle of the year, trying to offset higher costs of aluminum as tariffs on the metal increase the costs of soda cans.


Advanced Micro Devices reported second-quarter net income of $116 million, or 11 cents a share, compared with a loss of $42 million, or 4 cents a share, in the year-ago period. Adjusted earnings were 14 cents a share – slightly better than estimates. Revenue was in-line with estimates. AMD shares advanced 6.3% after hours.


Qualcomm beat quarterly earnings expectations, confirmed that it plans to end a long-planned acquisition of NXP Semiconductors and buy back up to $30 billion in stock. NXP shares gained more than 5% in immediate after-hours trading but then drifted lower. Qualcomm shares jumped 5.6%.


PayPal reported second-quarter earnings that topped Wall Street estimates, but its third-quarter revenue outlook fell short. Shares of PayPal fell more than 4 percent in after-hours trade.


Shares of Mattel dropped more than 8 percent after the company disclosed that it would be cutting 2,200 jobs. Mattel said this reduction represents 22 percent of its global non-manufacturing workforce. The toy company had announced a cost savings program in October, with the goal of eliminating $650 million in costs over two years — one-third of which it expects to achieve this year.


Sales of new single-family homes fell to an eight-month low in June and data for the prior month was revised sharply lower. The Commerce Department said new home sales decreased 5.3 percent to a seasonally adjusted annual rate of 631,000 units last month, the lowest since October 2017. The moderation in housing is largely driven by supply constraints, but there are concerns that persistent weakness could eventually spill over to the broader economy. Housing has been plagued by rising building material costs and shortages of land and labor, which have put a squeeze on the supply of homes available for sale and kept prices elevated. The housing market has underperformed the economy this year. Economists are forecasting no contribution from housing to gross domestic product in the second quarter. Residential investment subtracted from GDP growth in the first quarter. The government will publish its snapshot of second-quarter GDP on Friday.


Data from the U.S. Energy Information Administration showed US crude inventories fell 6.1 million barrels in the week to July 20. Gasoline stocks fell 2.3 million barrels. Higher oil prices and lower drilling costs have sparked an explosion of production out of the Permian Basin of West Texas. In fact, Texas is pumping so much oil that it will surpass OPEC members Iran and Iraq next year. If it were a country, Texas would be the world’s No. 3 oil producer, behind only Russia and Saudi Arabia. The combined output of the Permian and Eagle Ford is expected to rise from just 2.5 million barrels per day in 2014 to 5.6 million barrels per day in 2019. That means Texas will account for more than half of America’s total oil production. The boom in Texas has been so rapid that growing pains have emerged. The Permian Basin is quickly running out of pipelines to transport oil out of Texas, forcing companies to explore costly and potentially dangerous alternatives like rail and trucks. More pipelines are getting built, but they won’t be ready in time to fix the bottlenecks that have formed.


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