23 Jul Capital 19 Catch-Up – Jul 23

Aside from a Fed fuelled spike in Thursday’s session, Wall St spent much of last week moving lower as earnings season kicked off in full. It was a tough week for investors to gauge where to look, as we sifted through a deluge of second-quarter report cards, a raft of rate cut chatter, and some geopolitical drama to top things off.

We’ll start with the earnings though, which as we suggested last week have been better on the whole than expected. A low bar was set for companies to hurdle and so far the vast majority have managed to beat their estimates. Citibank (C) started the week with a win, beating on revenue and earnings per share, with fellow banker Bank of America (BAC) doing the same a day later. Wells Fargo (WFC) beat on profit but not on revenue and fell 3%, while American Express (AXP) beat on both, as well as confirming its current 2019 guidance, but still fell 2.79% after shareholders were left wanting more.

Microsoft Impresses

The most impressive result for the week, in my mind at least, came from Microsoft (MSFT). The largest traded company in the world still managed to blow away expectations, bringing in $33.7 billion in revenue ($1 billion more than expected), and $13.2 billion in profit ($3.8 billion more than expected but including a one-off tax benefit of $2.6 billion).

It’s incredible how quickly they have managed to modernise their business model. Over the last few years, they have set about moving their clients from a software-based model and into the cloud, as well as increasing business as data centre providers and in gaming, and it is now starting to pay dividends. For the first quarter ever sales of their Intelligent Cloud line became the company’s largest, increasing sales by 68% year on year. And while in the past they have kept their focus on attracting the large multinationals there was also a sizable increase in smaller organizations coming on board.

Friday was a tough day for the market, however, and the share price only gained 0.15% despite the impressive result. It is still up over 30% for the year and on Thursday hit all-time highs. Its market cap is now at $1.047 trillion, but it is still relatively cheap considering it has a price to earnings ratio of around 27. Despite being the largest company on the market there is still heaps of potential to move higher here. A little dividend of 1.35% p.a. is just a bonus. If you like a solid stock recommendation you can’t get much more blue-chip than Microsoft.

Microsoft wasn’t the only company to hit all-time and 52-week highs for the week. Other companies to hit records included McDonald’s (MCD) ahead of earnings this week, Adobe Systems (ADBE) which is up 6.2% since reporting first-quarter figures over a month ago, Cintas (CTAS) which jumped more than 7% on Wednesday after an earnings beat on Tuesday after hours, Costco (COST) which also beat earnings, Ross Stores (ROST), and Starbux (SBUX) who releases its second-quarter results on Wednesday.

Netflix

On the downside, another company that has been a great recommendation in the past, but that I now wouldn’t buy at gunpoint, is Netflix (NFLX). The streaming leader had a slight beat on earnings and a slight miss on revenue but it was all about the subscriber numbers, which fell for the quarter for the first time since they added streaming to their business model in 2010.

The fall in US subscriber numbers came in a quarter where they increased the cost of their most expensive membership from $11 to $13. In the past, price increases have pretty much sailed through without being noticed, however, it seems they may have found their price point. It’s a major concern for management who had been led to believe they could charge whatever price they wished and still keep customers. Yes, they have been spending a whole lot more on creating their own content, but if consumers aren’t willing to pay extra this spending may need to be curtailed.

We’ve spoken at length in the Catch Up about how good a buy Disney (DIS) was after they announced their Disney Plus streaming service. I wouldn’t go as far as to say it’s a Netflix killer, but it will certainly be a major thorn in the side. More importantly, it highlights how vulnerable Netflix is without producing its own content. Which is why they have been pumping so much money into producing their own.

At the current share price, Netflix is way too expensive. Even after dropping almost 15% over the last few sessions. I do love the product, don’t get me wrong, but I would want to see the share price back around the $200 mark, or see a serious uptick in profit before I began looking at it again. It’s certainly a potential shorting option. NFLX closed at $315.10 on Friday.

China Trade Deal

So, all in all earnings were on the strong side. It was news outside of Wall St that brought the market lower, however. Earlier on in the week, it was all about interest rates and the China trade deal.

Markets fell on Tuesday as Trump tweeted that there was “still a long way to go” in regards to negotiations between China and the US. It was confirmation of what we have been saying here all along, but it certainly didn’t impress Wall St.

There also seems to be a sticking point around allowing Huawei access to US companies. The White House wants to restrict it but they are copping grief externally from China and internally from the US tech sector who have been lobbying hard to change their minds. This may be one area where the negotiations may be able to move forward and then hopefully have a positive impact on the rest of the negotiations. Time will tell, but for now, we continue to play the waiting game.

Drama in the Middle East

Very late in the week we also saw more drama in the Middle East with Iran seizing two oil tankers. One belonged to the British and was supposedly taken in retaliation for Britain doing the same to an Iranian ship last month which was suspected of running oil into Syria. The other was owned by Liberia and was released after an inspection.

The escalation caused the market to fall late on Friday after it had initially started the day positively. We may hear more about the issue this week as Britain and the US decide what to do about this latest skirmish between Iran and the West. It may just be an ideal time to dabble in some US oil stocks who will benefit enormously from an escalation of the issue. You could also look at oil ETFs such as USO or XES, or the Aerospace and Defense ETF – ITA and the SPDR Kensho Future Security ETF – XKFS.

Interest Rates

Interest rates were again one of the main instigators for price gains and falls. The only real jump for the week happened on Thursday when the New York Fed Reserve President encouraged his fellow Fed members to “take swift action” to help push inflation higher. This led to many believing the Fed may drop rates by .5% this month instead of the .25% that all and sundry think is locked in. The markets rallied accordingly, but the hubris was nullified the very next day when fellow members sought to play down his remarks.

For the week just past the Dow was the best performer, only falling 0.7% to close at 27,154.2. Surprisingly, Boeing (BA) was the best performer as it announced it would set aside $4.9 billion to cover the 737 max issues. The market was expecting a higher cost than that, but goodness knows there may be more coming. Nevertheless, BA jumped 4.5% in the Friday session.

The S&P 500 slipped back under the 3,000 mark by the end of the week, dropping 37.16 points or 1.2%. The Nasdaq also dropped 1.2% while the Russell 2000 was the worst performer, falling 1.4% in a tough week for the smaller caps.

Top 5 Stock Performers

The best market-related news article of the week came from CNBC who gave us the top five stock performers since man first landed on the moon, which celebrated a fifty-year anniversary last Wednesday. McDonald’s (MCD) is the standout here, gaining 82,100% since July 21 1969. Home Improvement retailer Lowes Co (LOW) was in second place with a 70,000% rise, while Altria (MO) at 49,000%, Hasbro (HAS) at 43,000% and Disney (DIS) with a 40,000% gain rounded out the top 5. That’s one small step for man and one giant leap for Ronald McDonald.

In the week ahead earnings will again take centre stage as the reporting steps up another notch. Ten of the Dow’s thirty components will report their numbers this week, while 144 companies in the S&P500 will also report. It’s going to be a logjam of important data.

Tech Stocks

The big tech companies will lead the way with Facebook (FB), Amazon (AMZN), Alphabet (GOOGL), and Intel (INTC) all showing us their second-quarter results. We’ll also see the performances of Coke (KO), United Technologies (UTX), McDonald’s (MCD) and Visa (V) amongst a host of others.

Caterpillar Inc (CAT) will report on Wednesday and will be watched closely for signs of damage stemming from the trade war. So far around 30% of companies have made mention of tariffs having an impact on their forward guidance. We can expect this to continue as the big tech companies start coming forward this week.

Away from earnings, we have a policy meeting with the European Central Bank on Thursday. It will be interesting to see if they try to front-run the Fed and boost stimulus more than expected. A rate cut could just about entice Powell and his men to increase their own cut to 0.5%.

We’ll also see second-quarter GDP released on Friday in the US which will be a useful indicator for the Fed. Economists are expecting a slowdown in the economy so a strong result could actually push markets lower if there are fears the Fed may keep rates on hold. Alternatively, if it comes out worse than expected the 0.5% cut will be well in play.  Fun and games.

Please take a look below for all the data releases and big earnings reports coming out over the next week.

Hope you have a great week.

Cheers, Paul.

Earnings:

• Tuesday: 3M (MMM), Corning Inc (GLW), Coke (KO), Harley Davidson (HOG), Hasbro (HAS), Kimberly Clark (KMB), Pulte Group (PHM), Snap Inc (SNAP), Travelers Cos (TRV), United Technologies (UTX), Verizon (VZ), Xerox (XRX)
• Wednesday: Advanced Micro Devices (AMD), AT&T (T), Boeing (BA), Caterpillar (CAT), Facebook (FB), Ford Motor Co (F), O’Reilly Automotive (ORLY), Service Now (NOW), Tesla (TSLA), Visa (V)
• Thursday: Alaska Air (ALK), Alphabet (GOOGL), Amazon (AMZN), American Airlines (AAL), Chipotle Mexican Grill (CMG), Expedia (EXPE), First Solar (FSLR), Intel (INTC), Raytheon (RTN), Starbux (SBUX)
• Friday: Colgate-Palmolive (CL), Goodyear Tyre and Rubber (GT), McDonald’s (MCD), Twitter (TWTR)

Economic Data:

• Tuesday: Existing home sales
• Wednesday: Markit manufacturing PMI, Markit services PMI, New home sales
• Thursday: Weekly jobless claims, Durable goods orders, Core Capex orders, Advance trade in goods, Housing vacancies
• Friday: Gross domestic product Q2