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July 16, 2019

Much Ado About Nothing

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<span id="hs_cos_wrapper_name" class="hs_cos_wrapper hs_cos_wrapper_meta_field hs_cos_wrapper_type_text" style="" data-hs-cos-general-type="meta_field" data-hs-cos-type="text" >Much Ado About Nothing</span>

Much ado about nothing.  Stocks drifted slightly higher, even achieving records, on a day with very little to contemplate.  With earnings season looming, traders once again took the path of least resistance.

 

MY TWO CENTS

 

  1. Earnings cometh.  Yesterday morning’s Citigroup earnings announcement was considered the unofficial, official beginning to earnings season.  Big banks kick off “earnings season” and Citi got the honors yesterday morning.  This week will see over fifty S&P500 companies announce their last quarter earnings with many more coming next week.  Investors will be paying close attention to the results looking to justify the indexes resting on or near all-time highs.  Achieving those highs can be credited to the newly anointed custodians of stock market sentiment, the central banks.  However, in order for stocks to stay at these levels and go further in earnest, company performance must exist.  Investors will not only consider whether a company beats or misses Wall Street estimates, but also management commentary and future guidance.  Commentary and guidance are becoming increasingly important due to the ease at which companies can manipulate earnings per share.  When a company buys back stock under the guise of “returning capital to shareholders” as an alternative to dividends, they are lowering the pool of outstanding shares.  When companies announce earnings, the headline number is usually Earnings Per Share (EPS).  If earnings stay the same and the number of shares go down, EPS will increase, thereby giving the appearing of growing earnings.  Professional analysts are aware of this and build it into their models, but most investors simply look at the reported EPS and EPS Growth to gauge company health.  Citigroup’s earning announcement yesterday beat estimates with an EPS of $1.83 / share.  WHAT YOU NEED TO KNOW is that Citi reduced their outstanding shares by 10% in the last quarter, which inflates the number.  The moral of the story: when observing earnings announcements, read below the headlines and listen carefully to guidance.

 

  1.  There is a storm brewing.  In recent weeks there has been a silent but very noticeable increase in news regarding trade between the US and the EU.  In the shadow of the US-China trade war and the larger than life Fed, it would be easy to miss.  As reported here, the Administration had been contemplating a new list of EU-imported items to tariff.  The move was largely in response to an ongoing battle between Boeing and Airbus.  More specifically, Airbus received subsidies from EU members, which represents a breech in trade agreements.  There is a case before the World Trade Organization (WTO) and it is expected to rule in favor of the US, enabling them to levy tariffs on $5 to $7 billion dollars in imports.  It seems that the US will gain some leverage in their ongoing trade “discussions”.  Stay tuned, the ruling is expected soon.

 

MARKETS

 

Stocks posted a ho-hum increase yesterday as investors awaited the flood of earnings which will start today.  The S&P500 closed up by +0.02%, the Dow Jones Industrial Average climbed by +0.10%, the Russell 2000 slipped by -0.52%, and the NASDAQ 100 rose by +0.3%.  Bonds traded up and 10-year yields fell by -4 basis points to 2.08%.  WTI Crude slipped below the $60 mark on news that oil production in the Gulf has resumed in the wake of last week’s tropical storm.

 

WHAT’S NXT

 

- The Census Bureau will release Retail Sales which are expected to have grown by +0.2% month over month compared to last month’s +0.5% growth.  Excluding Autos and Gas, the figure is expected to be +0.3% compared to last month’s +0.5% increase.

- Fed governors Bostic, Bowman, Kaplan, and Evans will all speak today.  Fed Chairman Jerome Powell will speak as well.  Traders will be watching the tape even though a rate cut is well baked into the market.

- Johnson & Johnson, Dominos, JP Morgan Chase, Goldman Sachs, and Wells Fargo will announce earnings before the open.  After the bell announcements include CSX and United Airlines.

daily chartbook 2019-07-16