Capital 19 Catch-Up

Improving Economic Data and an Airline Bailout Brightens Wall Street as New Streaming Service Saves Disney’s Earnings


Coronavirus cases in the US cleared the 5 million mark and congress failed to agree on a new stimulus package to help the unemployed, however that didn’t stop the S&P500 and the Dow from gaining in every session last week. The Nasdaq would have done the same if it wasn’t for a fall in the Friday session after Trump issued executive orders seeking to ban the Chinese based WeChat and Tiktok apps. Overall, the Dow Industrial Average led the week with a 3.8% gain, its best result since the start of June. While the S&P500 gained 2.5%, which was also matched by the Nasdaq despite the almost 1% fall on Friday. The Nasdaq also managed to close above the 11,000 mark on Thursday for the first time.

Better than expected economic data was a major factor in Wall Street’s strong week. Manufacturing PMI came in at 54.2, much better than the 53.8 expected. Services PMI also surprised, rising to 58.1 when the market was looking for 55. The ADP private payrolls missed by a fair way, but the weekly jobless claims came in at 1.186 million which was its best result since the pandemic began. The non-farm payrolls also impressed with 1.7 million jobs created (1.4 expected) and unemployment dropping more than expected to 10.2%.

There was also some brighter news for the airlines who are still battling against a domestic and global shutdown. Senate Republicans on Wednesday supported an additional $25 billion in federal aid to help the sector as they fight to keep their heads above water. American Airlines (AAL) rose 20.6% for the week, while competitors United Airlines (UAL) and Southwest Airlines (LUV) gained 12.5% and 9.6% respectively.

It was also a good week for Catch Up favourite Disney (DIS). The House of Mouse managed an adjusted profit of 0.8c per share compared to the 0.64c loss that analysts were expecting. This was despite revenue from its theme parks, which have been mostly shut down during the pandemic, falling by 85% to below $1 billion, and income from theatrical releases being down 55% to $1.7 billion.

As we predicted last year, its streaming service Disney Plus was the highlight of the quarter, as it reached 60.5 million subscribers, which was four years ahead of schedule. If you include its Hulu and ESPN+ services Disney now has more than 100 million subscribers in its direct-to-consumer segment. It was the only segment to increase revenue for the quarter, rising by 2% to $3.97 billion. Disney rose more than 10% for the week.

No doubt consumers being stuck at home played a big part in the bounce. It will be interesting to see how many subscribers Disney can hang onto once the current dramas are over. The company also took the opportunity to announce another streaming service that will feature content from its acquired media companies including ABC Studios, Fox Television, FX, Freeform, 20th Century Studios, and Searchlight. Eventually, Disney will be hoping its stable of services will overtake the success of Netflix (NFLX) which currently boasts 193 million subscribers. I predict this will happen at some time within the next three years.

Over on Capitol Hill, the two main parties continued to argue about the components of a new coronavirus stimulus package. Both have agreed to another one-time $1200 stimulus check, however, the Democrats want to see the $600 per week unemployment supplement continue while the Republicans want to see it reduced to $200. Late in the week, the President attempted to pass an executive order to take this to $400 but this is expected to be passed as unlawful without congressional approval. The games will continue this week until someone blinks. In the meantime, the economy will continue to suffer while the two sides bicker.

Of bigger concern to the tech industry was Trump’s announcement that he would ban Chinese apps WeChat and TikTok within 45 days. This also includes banning US transactions with their parent companies Tencent and ByteDance. The White House is concerned that the private data of US citizens are being collected through state-owned apps by the Chinese government for nefarious purposes, and could be used for disinformation campaigns that benefit the Chinese Communist Party. I’d be surprised if this wasn’t happening.

The implications are more widespread than you would imagine, although it’s unclear at this stage just what the White House intends to commit to. Apple (AAPL) and Google (GOOGL) may be banned from allowing the apps in its app stores. Video game stocks like Take-Two Interactive (TTWO) will be impacted as owners of the worlds most popular video games Fortnite and League of Legends. While Tencent also owns part of Tesla (TSLA).

The White House will be hoping that Microsoft’s (MSFT) negotiations to buy Tencent are successful, thereby avoiding problems going forward. We will no doubt also see a Chinese retaliation at some point in the near future. It would be devastating for an American company to lose access to its Chinese market but let’s hope it doesn’t get to that. Perhaps negotiations between the two parties will bring a favourable resolution in the next 45 days before the orders are enacted. We’ll have to wait and see.

Earnings season will be winding down this week with only one Dow stock, Cisco Systems (CSCO) reporting, as well as 13 components of the S&P500. For the weed followers Canopy Growth (CGC) will report tonight, while other notable names for the week include Duke Energy (DUK), Sysco (SYY), Lyft (LYFT), and Applied Materials (AMAT). So far the S&P500 components are sitting at around an 84% earnings beat average which will be the best result since the stats started being compiled back in 2008. It goes to show how bad the analysts were expecting earnings season to be, and how companies have managed to avoid the worst-case scenarios visualised.

Data wise we’ll see the Consumer Price Index, the producer price index, retail sales and the continuing jobless claims. While across the country US school kids were meant to go back to school this week, however many are being held back by state and local governments as the number of coronavirus cases continues to rise. This is likely to have an adverse impact on the clothing retailers such as Gap (GPS) and American Eagle Outfitters (AEO), while Amazon (AMZN) may also be impacted.

Have a great week.