Netflix and spill

Stocks rallied yesterday as earnings bear estimates and hungry dip-buyers got their fill.  Rising bond yields did not daunt the buying frenzy.

Breathe, breath in the air.  Ok, we are at least ankle-deep in earnings season so far and the results seem to be consistent with what would be considered a “typical” earnings season.  Companies are beating estimates…by design.  There are some standouts, positive and negative.  One notable negative standout was Netflix (NFLX) which announced after yesterday’s close.  The company managed to beat EPS estimates, but the announcement shocked Wall Street with news that the company lost 200,000 subscribers last quarter and it expects to lose another 2 million in the current quarter. What’s worse is that the company has not experienced a quarterly loss in nearly a decade. Ouch! As one might expect, all its streaming competitors lost ground on the news. In contrast, a positive standout is that companies have been willing to provide more accurate forward guidance, and investors appreciate the… um, honesty. You may recall that most companies abandoned forward guidance altogether during the early days of the pandemic, leaving analysts and investors to fend for themselves. Now that we are in a post-peak-COVID, post-post-COVID-lockdown-boom, about-to-have-the-Fed-slam-on-the-brakes, bracing-for-a-possible-recession world, it seems only fair that companies should have a handle on how they might fair in the months ahead and to share it with us. Johnson & Johnson (JNJ) announced its earnings before yesterday’s open (featured in my note). J&J managed to beat EPS targets but missed revenue estimates on a quarterly revenue of $7.129 billion.  The company is clearly in good health, it simply missed analysts’ revenue estimates by -1%. The interesting part of the announcement is that the company decided to remove COVID vaccine sales from its forward guidance. The reason cited by the company was that it expected volatility in vaccine sales along with a sharp drop off in demand, combined with plenty of slack inventory. The company is strong in its core pharma business, offers a dividend yield of 2.47% and has some upside according to average analyst targets.  Perhaps that along with its honesty helped the stock rise by +3.05% in yesterday’s session.  Thanks for sharing J&J. You know who else loves to share?

Fed governors relish in the opportunity to share their thoughts. They have always attended lots of speaking engagements but they seldomly discuss policy. Clearly that is no longer their modus operandi, taking every opportunity to share their policy views, even some extreme ones. Yesterday, uber-dove Neel Kashkari, Minneapolis Fed Head, stated that the Fed needs to do much more to tackle, in his words, “much too high” inflation. For a dove like Kashkari, that is an aggressive saber rattle. A more familiar saber-rattler, James Bullard, who helms the St. Louis Fed, discussed the possibility of a +75 basis point rate hike. Wow, Jim, we haven’t had one of those since 1994! So, what’s the deal with all this tough talk, and should we be worried? Tough talk is just that, “tough talk,” and the Fed has learned that it could influence the market with its jawboning (that is actually a real Wall Street term). The Fed would like us to pull back on our spending and if they scare us enough, perhaps we might pass on that Ford F-150 purchase AT A PREMIUM and wait until we can get it at sticker prices, or dare I say, A DISCOUNT. On the question of should we be worried if the Fed raises rates by +75 basis points later this month, the answer is: no. Economists, and Fed policymakers alike, believe that the neutral Fed Funds rate is around 2.5%. That means that a rate below it is still accommodative, or stimulating, for the economy. Only a rate above that neutral level would have a slowing effect on the economy.  Policy makers are of 2 mindsets these days.  Some, like Bullard, would like to get to the neutral rate fast, giving the Fed optionality to actually press on the brakes, or press on the gas if the economy stalls. Others still favor a slow hiking process which would allow natural economic forces to take effect. Mortgage rates, currently at around 5.27% on average, are already the highest they have been since 2010, which will certainly have an impact on home prices. According to Fed Funds futures, there is a 91% probability that the Fed will hike rates by +50 basis points in 2 weeks, and a 0% chance of a +75 basis point hike. Sorry Jim. According to those same futures, there is a good chance that Fed Funds will be at or above that neutral rate by November. That leaves plenty of time (4 meetings) for the Central Bankers to hike, and countless combinations of +25, +50, +0, or even +75 basis point hikes. Rate cuts are always a possibility, but at this point…not likely.

WHAT’S SHAKIN’

Netflix Inc (NFLX) shares are lower by -27.4% in the pre-market after it announced that it lost 200 k subscribers last quarter and that it expects to lose an additional 2 million in this current quarter. On a forward P/E basis, Netflix remains the most expensive of its streaming peers, Disney (DIS) being the second most expensive. Potential average analyst target upside: +13%.

Anthem Inc (ANTM) shares are higher by +2.12% in the pre-market after the health benefits company announced that it beat EPS and Revenue estimates by +6.69% and +1.12% respectively. The company also raised its full-year profit outlook due to increased enrollment.  Dividend yield: 0.98%. Potential average analyst target upside: -3.0%. WHY IS THIS NEGATIVE?  Because the company’s current share price is above the average analyst target price for the stock. While this can be interpreted as the company being expensive, it does not mean that the stock will not continue to rise.

The Proctor & Gamble Company (PG) shares are higher by +1.59% in the pre-market after the company announced that it beat EPS and Sales estimates by +3.29% and +3.49% respectively.  The increase in quarterly revenue is the company's largest in 2 decades. The company said that consumers are paying more for household items like pampers and shavers. I guess one can say that the company is benefiting from inflation. Dividend yield: 2.28%. Potential average analyst target upside: +2.2%.

YESTERDAY’S MARKETS

Stocks climbed yesterday as investors rushed in to buy the dip. The S&P500rose by +1.61%, the Dow Jones Industrial Average climbed by +1.45%, the Nasdaq Composite Index jumped by +2.15%, the Russell 2000 Index traded higher by +2.04%, and the S&P500 ESG Index gained +1.53%.  Bonds traded lower and 10-year Treasury Note yields climbed by +8 basis points to 2.93%.  Cryptos advanced by +3.06% and Bitcoin traded higher by +1.53%.

NXT UP

• Existing Home Sales (March) is expected to have slipped by -4.1% after falling by -7.2% in February.
• The Fed Beige Book will be released this afternoon at 2:00 PM Wall Street time.
• Fed speakers today: Daly, Evans, and Bostic will speak today.
• Earnings after the closing bell include:  CSX Corp, Alcoa, Tenet Healthcare, Lam Research, SL Green, Kinder Morgan, United Airlines, Carvana, Knight-Swift Transportation, and Tesla.