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Capital 19 Catch-Up – Jul 9

Last week was a shortened week on Wall St, but that didn’t stop us from seeing all-time highs midweek, before a stumble on positive news later in the week. Both the Dow and the S&P500 finished with best all-time closing highs in the Wednesday session, as markets surged after another fall in long term bond yields. Yields are now down 27% for the year as concerns for the state of the global economy play on the minds of investors.

 

ADP National Employment Report

The ADP employment report disappointed with private employers adding only 102,000 jobs compared to the 140,000 expected. The poor result sent equities surging however, as investors saw the decline in jobs as a sure sign that the Fed would be cutting interest rates later in the month.

This ADP report always comes out before the official employment numbers. ADP is a company that runs payrolls for other companies. They look at how many cheques they have printed and think this can predict what the official employment numbers will say a couple of days later.

But it rarely does. I don’t understand why anyone pays any attention to this. In the office, we refer to the ADP report as “Another Dud Predictor”

Sure enough, when it came to Non-Farm Payrolls on Friday, it came in showing 224,000 jobs were added in June, well over the 165,000 expected. The good number shocked Wall St and equities started selling off. Apparently, lots of people having jobs is terrible for companies?

Absolute craziness of course, but it does show just how much the market can move on short term trading. The long term traders amongst us, which would be the majority no doubt, need to learn how to ignore the daily and even monthly swings of the stock market. Those of us with a ten-year portfolio plan want to see a strong economy, with lots of people in jobs, who can then spend their wages on products that are sold by the companies we own. A much better alternative to an economy heavily reliant on cash injections from the Fed Reserve just so it can keep treading water. You shouldn’t be hoping for an interest rate cut. You should be hoping for an economy that doesn’t need one.

Make no mistake, a good jobs report is good for equities in the long term. A downward swing in the market that happens on good news can be taken advantage of. They make perfect buying opportunities. More important factors over the next few weeks will decide where this market is heading in the longer term. Including the beginning of earnings season this week and of course any trade deal news.

 

The major indices

Despite the late drop, all of the major indices still made gains last week. The Nasdaq was the best, falling just shy of a 2% gain, while the S&P500 made 1.7%, and the Dow finished 1.2% higher. The small-cap Russell 2000 index made 0.6%. The banks led the way again, while Healthcare stocks struggled. The chipmakers also moved lower as Samsung cut guidance and profit for the final two quarters of 2019.

 

Company News

Tesla (TSLA) had a good week as the electric car maker beat estimates on car deliveries for the second quarter. They pushed out a record 95,200 cars in the three months to June. That was over 4000 more than the stock watchers had expected. The company announced they had “made significant progress streamlining our global logistics and delivery operations at higher volumes, enabling cost efficiencies and improvements to our working capital position”.

You’ve got to love a company who can’t make their products quickly enough to satisfy demand. And, yes, I know the production of an electric car is no doubt complex for what is essentially a tech startup. And my goodness, they’ve had a few issues, including having a founder and CEO who is, to put it mildly – a little “left field”. But if they can just get their manufacturing side in order the company could be absolutely anything. They just need to sort themselves out before the big boys rip the EV market out of their hands – which I’m guessing will be sooner rather than later.

Walt Disney (DIS) and Sony Corp (SNE) also had impressive weeks as their respective movie blockbusters ruled the box office. Spider-Man: Far from home dominated the screens, pulling in an estimated $185 million in North American sales over the 6 day holiday period. And although it’s a Marvel movie, whose characters are owned by Disney, the Spider-Man movie franchise is actually owned by Sony, who purchased the web-slinger well before the Disney deal was made. Sony gained almost 5% during the week. But all was not lost for Disney who’s Toy Story 4 has now clocked up more than $650 million globally since opening. Disney made 2.42% for the week to continue its brilliant run so far in 2019.

 

Earnings Season

Earnings season is creeping up on us this week, as a few early birds release numbers before the big banks kick off the official start next week. The analysts are pessimistic about what to expect out of second-quarter results with many predicting the first year on year quarterly decline since 2016.

Companies themselves haven’t been throwing out the positive vibes either, with 87 of the 113 companies to issue guidance so far being on the negative side. The information technology sector is the main concern amongst the pundits, with Goldman Sachs predicting a 10% year-over-year drop from the likes of Apple and the reliant semiconductor stocks. The tariff war has hurt this sector more than most and they would see a welcome relief for any good news coming out of the current negotiations.

Delta Airlines (DAL) is one company that will sneak ahead of the banks and release earnings early this week. It’s one of the few companies that has increased guidance instead of lowering it for the quarter just gone. They’ve been growing capacity, as well as revenue per available seat, as a jump in the cost of airline seats benefitted the flyer. And while other airlines have been hamstrung by the flight ban on the Boeing Max 737 it hasn’t affected Delta – they don’t own any. Punters will be looking for revenue in the realms of $12.5 billion, and earnings per share of $2.24.

We’ll also see early results from denim specialists Levi Strauss (LEV), homemaker product seller Bed Bath & Beyond (BBBY), and construction suppliers Fastenal (FAST). While Pepsico’s (PEP) results were delayed from last week and will now be out tonight.

It’s pretty quiet on the data front, but we’ll be watching closely for the FOMC minutes that come out on Wednesday as well as Jerome Powell’s testimony in front of Congress. We will hopefully receive some hints about the chance of a rate cut at the end of the month. And on Friday China will release their foreign exchange reserves, and we’ll be able to see what they have been doing with their USD supplies. Take a look below for more details on earnings and economic data releases.

Have a great week.

Cheers, Paul.

 

Earnings:

  • Tuesday: Century Bancorp (CNBKA), VOXX International (VOXX), Pepsico (PEP)
  • Wednesday: AngioDynamics (ANGO), Service Team (SVTE)
  • Thursday: Delta Airlines (DAL), Fastenal (FAST), Rocky Mountain Chocolate Factory (RMCF)
  • Friday: First Bancshares (FBSI), L3Harris Technologies (LHX)

 

Economic Data:

  • Tuesday: NFIB Small business index, Jerome Powell testimony, Job openings
  • Wednesday: Jerome Powell testimony, Wholesale inventories, FOMC minutes
  • Thursday: Weekly jobless claims, Consumer price index, Core CPI, Federal budget
  • Friday: Producer price index

 

 

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