Financial Review

Stocks Fall Again

…Earnings season onslaught just can’t beat year ago numbers. Chip stocks hit hard. Averages take big hit but rebound slightly. Saudis killed a journalist in Istanbul; now we see the cover-up.

DOW – 125 = 25,191
SPX – 15 = 2740
NAS – 31 = 7437
RUT – 12 = 1536
10 Y – .03 = 3.17%
OIL – 3.27 = 66.09
GOLD + 8.20 = 1230.90

 

The good news is that it wasn’t worse. The Dow Industrial Average was down about 550 points in early trade before a recovery, of sorts. The S&P 500 Index dropped below the October lows – also taking out the 200-day moving average – and matching the lows from July. We have not seen any really panicked selling. Today stocks moved lower, offering plenty of opportunity for a freak out but now, stocks did not freak of panic. Each of the big three U.S. benchmark indexes briefly undercut the October low early Tuesday — tagging multi-month lows — as the markets continue to seek a durable floor. And while stocks did recover from session lows, it was only after the damage was done; after the markets established new, lower levels of support. For now we have a very wide trading range, which would indicate more volatility ahead. And for Dow Theorists who have opened up their charts, you will notice an October breakdown in the Transports. The idea behind the Dow Theory is that when either industrial or transportation stocks make new highs, it’s important for the other to follow. When that confirmation doesn’t come, there’s cause for concern.

 

Caterpillar posted disappointing full-year guidance even as the company delivered revenue and profits that topped analysts’ expectations. Revenue gained 18% to $13.5 billion, versus average expectations of $13.3 billion from Wall Street. Earnings came in at $2.86 per share, a penny better than expected. However, Caterpillar noted that manufacturing costs were higher due to increased material and freight costs, and material costs rose along with increases in steel prices and tariffs. Caterpillar, a major player in global industrialization is largely viewed as an economic bellwether.

 

3M downwardly revised its forecast for annual profits, sending shares of the mixed manufacturer tumbling in early trading. The company trimmed its outlook for the third time this year for signals of fallout from the trade war. 3M dropped more than 7% earlier and finished down over 4% on the session.

 

McDonald’s (MCD) beat Wall Street expectations on both the top and bottom lines, but missed in domestic same-store sales. The company delivered earnings of $2.10 per share, 11 cents better than average analyst expectations. Domestic same-store sales missed slightly at 2.4% versus expectations of 2.5%

 

Harley-Davidson beat estimates by 15 cents a share, with a 68 cent per share profit. They beat on the top line with improved European sales and a full-year motorcycle shipment forecast. Harley-Davidson is recalling about 238,300 motorcycles, worldwide, for a clutch problem — the fourth recall for a clutch issue in five years.

 

United Technologies beat third-quarter profit and sales expectations.

Verizon Communications beat analysts earnings and sales forecasts.

Biogen reported third-quarter earnings and revenue that were better than expected.

PulteGroup reported a 63% jump in earnings for the third quarter.

 

Target will add more delivery and pickup options for online shoppers to have items shipped to their homes or ready for quick pick-up at a local store. Target will offer free two-day shipping on hundreds of thousands of items from Nov. 1 to Dec. 22 with no order minimum or membership required. Target will also offer drive-up service, where packages are brought out to a car. Target’s two-day shipping option is less expensive than Amazon.com Inc’s, which requires an annual subscription fee of $119 under its Prime membership service. Walmart Inc offers free two-day shipping for a minimum order of $35.

 

Year to day, the Dow Industrials have posted a gain of 1.2%. compared with a 1.2% gain in the Dow, a 1.8% gain in the S&P 500, and a 6.8% advance in the Nasdaq. The Philadelphia Semiconductor Index, or the SOX, is down 2.5% year to date. We have some big names in tech reporting earnings this week, including: Amazon, Alphabet, Microsoft.

 

Investors will get a better indication of how tariffs against Chinese goods will affect U.S. chip makers, many of whom supply the massive Chinese chip market, in corporate outlooks when AMD reports earnings after the bell on Wednesday, and Intel reports on Thursday. Adding to trade war concerns, a recent Morgan Stanley survey of chip distributors found that oversupply indicators currently look worse than those encountered in the sectors last big down turn in 2015.

 

The hardest hit chip stocks in October have been Advanced Micro Devices and Nvidia which have both dropped about 20% in the month to date. They are followed by shares of Micron Technology and Microchip Technology which are both down 15% for the month.

 

While earnings growth is still high at 22 percent so far this quarter, the amount by which S&P 500 index companies are beating analyst estimates is nearly half of what it was during the first quarter. Trade tensions are coming home to roost and they are impacting the fundamentals of the market. Thanks to trade tariffs we are facing the headwinds of a stronger dollar, higher oil prices, and rising interest rates. The forward price to earnings ratio of the S&P 500 index was 16.2 as of Monday, down from a 2018 peak of 18.5 on January 22. At the same time, U.S. companies are on pace to purchase more than $1 trillion of their own stock this year, according to TrimTabs Investment Research, and lower valuations could lure them to buy more.

 

Texas Instruments shares fell more than 5 percent during after-hours trading after the company missed estimates in its revenue and giving weak fourth quarter guidance.

 

The $1.5 trillion tax cut passed by the Republican controlled Congress in December 2017 boosted corporate earnings earlier this year, and encouraged companies to repatriate cash parked overseas, but the tax cuts are now being offset by costs resulting from the new import tariffs. Overall, the earnings growth rate of S&P 500 index companies peaked in the first quarter of this year at 26.6 percent, according to Refinitiv data. The third quarter is currently on pace for a 22.1 percent growth rate, while earnings growth is expected to slide to a 9.0 percent increase in the second quarter of next year as companies face tougher comparisons due to the tax cut boost in 2018. Raw-material and other costs are rising, as they usually do at this stage in the business cycle, and the U.S.-China trade war is adding pointless new expenses on top of that. Companies are treading water when they should be riding one last profit wave.

 

Turkish president Erdogan today talked about the details of the disappearance of Saudi journalist Jamal Khashoggi, who disappeared inside the Saudi consulate in Istanbul on October 2. The Turkish president insinuated that the Saudi government had plotted for days to kill the journalist by presenting a clear timeline. Erdogan’s account fully contradicts the Saudi government narrative that Khashoggi was killed in a “rogue operation” gone awry. But he stopped short of calling out Crown Prince Mohammad bin Salman (MBS) by name. The Saudis claim that an interrogation by 15 Saudi officials, somehow went wrong and resulted in the accidental death of Khashoggi. Erdogan made it clear that Turkey would pursue this case — and called for the suspects to face prosecution in Istanbul, rather than Riyadh. Erdogan, in other words, is not going to let Khashoggi’s death quietly disappear. At the same time, Erdogan did not offer up specific evidence.

 

Cold hard cash can coverup a host of sins. Saudi Arabia has signed agreements worth over $50 billion with global companies at an investor conference in Riyadh despite the international uproar over the killing of journalist Jamal Khashoggi. State oil company Aramco announced that it had signed 15 memorandums of understanding worth $34 billion with firms from eight countries, including the United States. Among the companies partnering with Aramco are US oil field service firms Halliburton, Schlumberger and Baker Hughes. US conglomerate Air Products will work on a gas power project. France’s Total has agreed to begin engineering studies on building a petrochemical complex, as well as partner with Saudi Aramco on a retail gas station network. Hyundai Heavy Industries, from South Korea, will develop a maritime facility. Secretary of State Mike Pompeo said the U.S. is revoking visas for some of the Saudi officials responsible for the death of Washington Post journalist Jamal Khashoggi at the Saudi consulate in Istanbul. He didn’t say how many visas were being revoked

 

And while the controversy between the Saudis and the Turks might be enough to stir up oil markets, the opposite is happening. The oil traders calculate the Saudis will be on their best behavior moving forward, meaning the oil will flow without interruption. WTI dropped more than 4% and prices settled below the 200-day moving average. Saudi Arabia’s energy minister sought for a second straight day to assure markets that the kingdom will keep the world adequately supplied with crude. The sanctions on Iranian crude go into full effect on Nov. 4. Washington is largely depending on Saudi Arabia to fill the gap left by the loss of the Iranian barrels.

 

The U.S. Supreme Court said that states and interest groups suing the Department of Commerce over its intent to include a citizenship question on the 2020 Census cannot compel a deposition from Commerce Secretary. Wilbur Ross. The plaintiffs claim that Ross and the Trump administration are acting in “bad faith” in adding the citizenship question in a backhand attempt to weaken voting rights of minorities.

 

 

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