Financial Review

October Out

…October was a bad month for stocks, and oil. Earnings season rolls on. ADP 227k private jobs.

Financial Review by Sinclair Noe for 10-31-2018

DOW + 241 = 25,115
SPX + 29 = 2711
NAS + 144 = 7305
RUT + 4 = 1511
10 Y + .05 = 3.16%
OIL – 1.25 = 64.93
GOLD – 8.50 = 1215.10


At least October is over. And Wall Street managed to string together 2 winning sessions to finish the month – these were the only back to back positive sessions for the month. For October, the Dow lost about 5%, the S&P dropped about 7%, and the Nasdaq Composite gave back 9%. It was the worst month for the S&P 500 since 2011.


The Dow Jones has some minor support at $24,500. It has minor support at $24,000. But it’s next major support is $23,500. Below that and things are getting ugly. The Dow’s resistance is now at $25,500, which is a long way up from where it’s trading now. The S&P 500’s support is at $2,600, then $2,550. Below that is an even scarier place for us all. The S&P’s resistance is now at $2,800. The Nasdaq Composite’s support is at $7,000. Below that there’s some support at $6,800. Below that is nothing but air. The Nasdaq’s resistance is all the way up at $7,600.


US stocks lost about $2 trillion in October. Technology stocks just capped off their worst month since the depths of the recession a decade ago. The FAANG stocks were among the hardest hit this month. Amazon and Netflix end the month down about 20 percent each. Investors fled both after earnings reports. Facebook and Alphabet are on pace to finish October down over 8 percent each. Semiconductors were one of the hardest hit sectors in the stock market. Shares of Nvidia, Advanced Micro Devices, Micron and Applied Materials all posted double-digit losses for October.


AMD has had a particularly rough month — that stock was far and away the best performing stock in the S&P 500 at the end of September. But shares have plunged more than 20 percent since the start of October, its worst monthly performance since 1992.


Apple is the last domino standing. Its FAANG brethren have all crashed, even the mighty Amazon, which has slumped about 25% from all-time highs. Apple’s decline is more in line with that of the S&P 500. Tomorrow, Apple reports quarterly earnings. If Apple falls, it’s likely that the market would follow.


The big question is whether now is the time to buy the dip, or is the dip warning us that there is more trouble baked into the market?  This is why we pay attention to levels of support and resistance. Amazon has corrected about 25% from its all-time high of $2,050.50 in September. Amazon missed sales revenue estimates in its Q3 earnings report. However, the company still has incredibly strong revenue-generating potential going forward; revenue still showed YoY growth of 29.33%. Amazon stock is trading at about 86-times trailing earnings, and 55x forward earnings, according to data from Morningstar. While these numbers are admittedly high in comparison the overall market, it is worth noting that it is certainly not unusual for high growth stocks to trade at high earnings multiples. At some point, investors will start stepping up to take long-term positions. How you choose to go about it obviously depends on your personal budget, risk appetite and patience. But even if some traders jump back into the market, there are no guarantees we won’t see further declines. November features several variables that could influence markets, including an upcoming G-20 summit of world leaders, the midterm elections, the latest jobs report and a Federal Reserve meeting on monetary policy.


October wasn’t just a tough month for equities, it was also a crushing month for crude oil. After hitting four-year highs at the beginning of October, WTI crude oil futures fell 14% from those highs and had their worst monthly performance since July of 2016. US sanctions on Iran’s crude oil exports take effect November 4 and have been part of a bullish argument for crude prices as they would further tighten supply, but for the month of October, traders focused on global demand and supply, trade wars and the strong dollar hurting emerging market demand. Following this month’s correction in oil, we are seeing some support right here, just below $65 per barrel – the big question for Monday is whether the support will hold.


Kellogg expects full-year adjusted earnings per share to rise about 7% to 8%, versus the previous guidance of 11% to 13%. Sales in Kellogg’s US morning foods unit, which includes cereals such as Froot Loops and Corn Flakes, declined 1.3% in the third quarter. The company had recalled 1.3 million cases of Honey Smacks in June on account of a potential salmonella contamination. The stock slid about 9%.


General Motors posted third-quarter results that exceeded Wall Street’s expectations. GM also said it expects profit for the year to reach the high end of its previously issued guidance, with the potential for earnings to beat $6.20 per share. Shares of GM rose just a bit more than 9%.


Facebook reported after the bell Tuesday, posting lukewarm results following weak second quarter results in July. The company beat on earnings per share while missing narrowly on revenue and global daily active users. Company executives emphasized the company’s efforts to shift focus from newsfeed to videos and stories, with CEO Mark Zuckerberg calling 2019 a year of “significant investment” for the company as it works to monetize the newer features. Shares of Facebook rose slightly.


Yum Brands, the parent company of KFC, Pizza Hut and Taco Bell, beat consensus expectations on both the top and bottom lines and posted better-than-expected sales for international markets. Same-store sales, a key metric for restaurant companies, grew 2% for Yum in the third quarter. Yum shares up over 4%.


Shares of eBay rose after the company reported earnings that exceeded consensus expectations. Earnings were 56 cents per share, versus expectations of 54 cents per share.  Revenue came in at $2.65 billion for the third quarter, in-line with expectations. The e-commerce company sees earnings between 67 cents and 69 cents per share in the fourth quarter, versus the 67 cents analysts expected.


Fitbit reported adjusted earnings of 4 cents per share, versus consensus estimates of a loss of a penny per share. Revenue came in slightly higher than estimates. Fitbit spiked over 10% in after-hours.


Denny’s said it intends to sell most of its company-owned stores over the next year-and-a-half. The company plans to sell 90 to 125 restaurants to bring total franchised locations to a target range of between 95% and 97%. Currently, about 90% of the chain’s 1,715 units are franchises. Denny’s shares jumped over 22%.


Volkswagen and Ford Motor are in “exploratory talks” to jointly develop self-driving and electric vehicles in a far-reaching strategic alliance meant to save the companies billions of dollars. Automakers globally are discussing teaming up to share the share the cost of developing autonomous and electric vehicles. Honda earlier this month said it would invest $2.75 billion and take a stake in General Motors’ Cruise Automation self-driving vehicle unit to jointly develop autonomous vehicles for deployment in ride service fleets globally. VW and Ford are under pressure to roll out more EVs in Europe, where emissions rules are being tightened in the wake of Volkswagen’s diesel emissions pollution scandal.


General Motors is offering buyouts to salaried employees with 12 or more years of service. GM said in a separate statement that it would consider layoffs after it sees the impact of the buyouts and other cost cutting efforts. About 18,000 of the company’s 50,000 salaried employees in North America are eligible for the buyouts.


The US added 227,000 non-farm private sector jobs in October, according to a report from the ADP Research Institute. Service-providing jobs were up 189,000 for the month, and goods-producing jobs were up 38,000. ADP’s release gives a preliminary snapshot of employment conditions ahead of official results from the Department of Labor Friday, but the two sets of reports can sometimes offer disparate results. That’s because the DOL’s figures include only those paid during the survey period, while the ADP survey considers anyone on the payroll as employed – meaning that ADP latest results didn’t necessarily capture any hit from Hurricane Michael. We’d be very surprised to see Friday’s headlines as strong as the ADP data, but with hurricanes making landfall in the survey weeks in both September and August, the numbers could be all over the board.


The Labor Department’s employment cost index rose 0.8% in the third quarter, exceeding consensus estimates of 0.7%. Wages and salaries increased 0.9%, which also topped expectations of 0.5%. This marks a 3% increase in wages and salaries over the last year. Overall compensation costs for civilian workers ticked up 2.8% for the 12 months ending in September.


The Federal Reserve said it wants to ease regulations for U.S. lenders with less than $700 billion in assets, a way to lessen the burden on big commercial lenders that do not have volatile Wall Street businesses. Under the Fed proposal, midsized lenders including U.S. Bancorp, Capital One Financial, PNC Financial and Schwab would face lower liquidity and compliance requirements, and smaller banks would get even easier treatment. The proposal stems from a law Congress passed in May that ordered the Fed to reduce regulatory burdens on community and regional lenders. The proposal also gives the Fed flexibility to impose stricter rules on banks with less than $700 billion in assets if they engage in higher levels of risky activity.


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