Financial Review

To the Dogs

…Stocks muddle into earnings. IMF goes risk off. Powell to speak. Retail sales bounce. Netflix disappoints. BofA goes mobile. Amazon crashes, with dogs. Trump-Putin summit also a pretty spectacular crash.

Financial Review by Sinclair Noe for 07-18-2018

DOW + 44 = 25,064
SPX – 2 = 2798
NAS – 20 = 7805
RUT – 8 = 1678
10 Y + .03 = 2.86
OIL – 3.06 = 67.95
GOLD – 80 = 1241.20

 

For most of the session the Dow Industrials barely managed to stay in positive territory, while the S&P 500 and the Nasdaq couldn’t quite claw their way out of negative territory.

 

Of the 30 S&P companies that have reported earnings through Friday, 86.7 percent have topped earnings expectations, above the 75-percent average of the past four quarters. That sounds like a strong start to earnings season, yet stocks were flopping around like a fish out of water. You might wonder if earnings are enough to lift stocks out of their trading range. The market appears to increasingly focus on the sustainability of growth; and with future comparisons getting harder, economic growth due to slow in the second half of the year, the dollar tail wind to EPS dissipating, and commodity and operating costs moving higher, the current level of growth boosted by a one-time tax benefit is likely to fall significantly. Also consider that the Dow and the S&P are still in correction territory, unable to break above the January-February highs, and the risk-reward seems steep.

The International Monetary Fund is in the “risk-off” camp. Today, the IMF published an update of its world economic outlook. The IMF continued to project global growth rates of 3.9% for this year and 2019, but said this strong growth is “fragile [and] under threat,” and “The risk that current trade tensions escalate further — with adverse effects on confidence, asset prices and investment — is the greatest near-term threat to global growth.” If current trade threats are realized and business confidence falls as a result, global output could be 0.5% below current projections by 2020. The U.S. is “especially vulnerable” because it may find a relatively high share of its exports taxed in global markets.

 

The IMF kept its U.S. growth forecast of 2.9% for this year and 2.7% growth in 2019. The IMF cut its euro-area forecast by 0.2 points to 2.2% GDP growth in 2018 and by 0.1 point to 1.9% in 2019. It trimmed its growth outlook for Germany, France, and Italy for the next two years. The agency lowered its growth estimate for the United Kingdom this year by 0.2 points to 1% and cut its growth estimate for Brazil in 2018 by 0.5 points to 1.8%. The IMF trimmed its Japan GDP forecast for 2018 by 0.2 points to 1% growth.

 

Fed Chair Jerome Powell will testify on the economy and monetary policy before the U.S. Senate Banking Committee on Tuesday, followed by testimony on Wednesday to the House of Representatives Financial Services Committee. He is likely to reiterate the Fed’s gradual monetary policy tightening, although any suggestion of caution on trade could unravel the market’s appetite for risk. The dollar was down slightly today but it has benefited from expectations of further interest rate increases this year as well as a growing belief that the United States is better placed than its major rivals to withstand a potential disruption in global trade.

 

Sales at retailers such as auto dealers, restaurants and Internet sites rose in June after a big gain in May, underscoring the strength of the U.S. economy as spring turned to summer. Retail sales nationwide grew 0.5% last month. The increase last month followed an even bigger burst of spending in May, when sales grew a revised 1.3% instead of previously reported 0.8%. Retail sales have increased 6.6% over the past 12 months, slightly above the long-run average since 1980. Retail sales have accelerated, in part because of higher gas prices. Gas stations posted a 1% increase last month and sales are up a whopping 21.6% in the past year. Sales at health and personal care stores leaped 2.2% in June. Restaurants posted a 1.5% gain. Internet sales jumped 1.3%. And auto dealers reported a 0.9% increase. Sales fell slightly at groceries and electronic stores. They declined sharply at department stores and outlets that sell clothing, books and sporting goods.

 

When a company disappoints on earnings, the results can be brutal. The Example of the Day: Netflix, posted earnings after the closing bell. Netflix reported net income for the latest quarter rose to $384 million, or 85 cents a share, up from $66 million, or 15 cents a share, in the same quarter a year ago, ahead of estimates of 79 cents. Revenue rose to $3.9 billion from $2.7 billion the year before. If you have followed Netflix for any time, you know that earnings are not the key metric – rather subscription growth is the key. And Netflix reported it had added a net 5.15 million subscribers, below the FactSet consensus of 6.2 million. Netflix dropped 13% in after-hours trade. One bad quarter doesn’t mean Netflix is doomed. The shares were up more than 100% since the start of the year, such a high flyer should expect some volatility. Part of the story behind Netflix is that it is able to grow so fast that its massive global subscriber growth will eat away at legacy media companies.

 

Bank of America reported quarterly profit above analyst expectations. BofA, the second-largest U.S. lender cut expenses and benefited from growth in loans and deposits on the back of a strengthening economy. Overall, Bank of America’s net income applicable to common shareholders rose 36.3 percent to $6.47 billion in the second quarter. Excluding items, it earned 64 cents per share compared with the average expectation of 57 cents per share. Bank of America announced that deposits made on mobile devices like smartphones and tablets are outpacing those made at branches for the first time. Customers logged into Bank of America’s mobile app 1.4 billion times last quarter. The rapid adoption of mobile banking has allowed big banks to massively shrink the number of expensive branches they operate. Bank of America’s vast network of branches fell to 4,411 at the end of June, compared with 4,542 a year ago. The company has 1,720 fewer branches than it did in June 2008. That’s a 28% drop. Shutting branches allows traditional banks to cut costs. Bank of America’s non-interest expenses dropped by 5% last quarter, the most in two years.

 

Today kicks off Prime Day for Amazon. According to the Bloomberg Billionaires Index, Amazon founder and CEO, Jeff Bezos saw his personal net worth climb to over $150 billion this morning. Amazon shares were up a bit over 1% earlier, closed up 0.5% and are trading lower in after-hours. Amazon’s Website Crashed Within Minutes of Starting Amazon Prime Day. Trouble on the site spiked just as the event began at 3 p.m. Eastern time. The Amazon Prime landing page had a picture of a sad looking dog, and a line saying “Something went wrong on our end. Please try again.” Some shoppers could still search for regular items, and to click through on Amazon-branded electronics such as the Echo Dot, which was featured on the main Amazon.com page. However, purchasing was not possible in the first hour of the sale. Users could also access their online shopping cart, but when they attempted to actually purchase something they got message to try again and the doggy pictures. The much-vaunted Amazon deals were also not immediately available. Last year’s Prime Day sale was estimated to have generate about $2.4 billion in sales last year, and this year’s 36-hour sale was predicted to reach $3.4 billion.

 

Today also wrapped up the Trump-Putin Summit. Standing side-by-side with Vladimir Putin at a press conference after a roughly 2-hour meeting, Trump refused to blame the Russian leader for meddling in the U.S. 2016 election, casting doubt on the findings of his own intelligence agencies. Trump spoke not a single disparaging word in public about Moscow. Trump’s handling of a joint news conference in Helsinki stirred a wave of bipartisan condemnation in the United States. His performance was denounced as “treasonous” by former CIA chief John Brennan.  Senator John McCain called the meeting with Putin a “tragic mistake,” although some other Republicans were more cautious. In one response, the Director of National Intelligence Dan Coats, a Trump nominee approved by Congress, said in a statement on DNI stationery, “We have been clear in our assessments of Russian meddling in the 2016 election and their ongoing, pervasive efforts to undermine our democracy, and we will continue to provide unvarnished and objective intelligence in support of our national security.” Before the summit even began, Trump tweeted: “Our relationship with Russia has NEVER been worse thanks to many years of U.S. foolishness and stupidity and now, the Rigged Witch Hunt!”

 

A couple of hours after the summit, the Department of Justice announced the arrest of a Russian national — Maria Butina — for secretly trying to influence US politics at Russia’s behest. An affidavit filed by an FBI agent asserts that Butina tried to cozy up to a gun rights organization so she could influence a major political party, all the while working for a top Russian central bank official and trying to advance the interests of the Russian state — and not registering as a foreign agent. Though the affidavit does not name many of the people and groups involved, previous reporting and context clues make it clear that the gun rights group is the National Rifle Organization, the party is the Republican Party, and the Russian official is Alexander Torshin. The Butina case is not part of special counsel Robert Mueller’s probe — she was investigated by the FBI’s Washington field office, and will be prosecuted by the US Attorney’s Office for the District of Columbia.

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