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Capital 19 Catch-Up – Mar 19

US stocks continued their advance last week as the S&P500 (up 2.9%) and the Nasdaq (up 3.8%) hit five-month highs, and the Dow gained 1.6%, undeterred by its most influential component Boeing (BA) falling 10%.

Despite being the most watched and most well-known of the major indicators, the Dow is a somewhat antiquated way of measuring the state of the US market. For starters, it only consists of thirty components, and while these companies are meant to represent a mix of important large-cap companies across all of the sectors, it is almost an impossible task (performed by a team of editors at the Wall Street Journal) to cover the whole range of 4000 odd stocks that trade on the NYSE or Nasdaq.

Secondly, and this was highlighted during the week by the performance of Boeing, the index is calculated using the price-weighted method. To work out the price of the Dow, Dow Jones adds up the share prices of the 30 companies, then divides that number by the Dow Divisor – which is designed to adjust for major changes to prices such as stock splits etc (it is currently 0.14748071991788). This means that higher-priced stocks have a higher rating than smaller priced stocks, regardless of the actual size of the company.

So this week, when Boeing fell 10% it had a much larger effect on the Dow than any other stock would have. BA, by the end of the week, was worth $378.99. It’s weighting on the Dow is sitting fractionally below 10% at the moment.  The second biggest of the Dow components is UnitedHealth Group at $251.40 and commands a weighting of only 6.59%. While the lowest weighted are Coke (KO) and Pfizer (PFE) on $45.30 and $41.78, with weightings of 1.19% and 1.10% respectively.

Pfizer has a bigger market cap than Boeing – $231 bill to BA’s $213 bill – yet its value to the Dow is minuscule compared to the plane manufacturer. In fact, Boeing is ranked only fifteenth when it comes to market cap. Microsoft (MSFT) $889 billion, Apple (AAPL) 877 $billion, Johnson & Johnson (JNJ) $366 billion, JP Morgan (JPM) $348 billion, and Exxon Mobil (XOM) $339 billion, all dwarf it, yet have less than half the influence on the most prominent indicator most punters see on the TV or in the news.

The S&P 500, on the other hand, is market cap weighted. Meaning you take the number of shares a company has and multiply this by the share price. It’s a much fairer way to measure overall influence in an index and avoids issues such as we see above. It’s why all serious traders use the S&P500 as the benchmark and not the dow.

Anyway, back to Boeing, where the US Federal Aviation Administration (FAA) finally grounded the 787 Max jets, long after the rest of the world had done the same thing. BA has stopped delivering the 737 max but will still continue manufacturing them as they look to provide a software update for the plane. It has been suggested that the planes may be stopped from flying from between three and six months.

The effect the recent crashes will have on airline orders for new planes going forward is unknown. It may just prove a boon for rival Airbus (EADSY) who are the most likely to take advantage of Boeing’s misfortune.

Airbus was first devised as a joint development between Britain, France and Germany as a move to combat the US dominance of the aircraft industry. The two companies have been in a fierce battle ever since to dominate the airways. The recent drama could play right into their hands. Add to this the chance for Airbus to capitalise on the trade war currently going on between the US and China, and between the US and every other country that is currently involved in a trade battle with the US, and there are massive opportunities for Airbus to take a good chunk of Boeing’s market share in the near future.

On the Capital 19 trading platform, you can buy Airbus in a few different ways. You can use the code EADSY and buy it as a pink sheet stock in the US. The advantage with this is it will be in USD, and you may be used to that. But if you’re happy to trade in EUR, however, you’d be better off buying the actual stock on the French exchange using the code AIR.

Away from Boeing now, and it was the tech stocks that led the way. The two largest companies in the world Microsoft and Apple led from the front. Both are members of the Dow, the S&P500 and the Nasdaq so helped lift numbers across the board. Apple was up 7.6% for the week, its best performance in seven months, while Micorosft hit record highs, moving 4.9% higher.

Nvidia (NVDA), which we suggested would be a good buy in last weeks Catch Up also had a blinder of a week, gaining 13% over the five sessions. Broadcom (AVGO) was also impressive, gaining a healthy 8.24% on Friday after beating profit estimates for the last quarter and breaking even on revenue. Gross margins improved, cash flow grew by 39%, and the chip maker said they planned to return $12 billion to shareholders via dividends and stock buybacks.

Adobe (ADBE) was another that released results after the market closed last Thursday. It also beat on profits and narrowly beat on revenue, yet the market punished the software developer for poor guidance in the next quarter. ADBE lost almost 4% for the Friday session, dropping to $257.09. It predicted earnings of $1.77 for Q2 when the market wanted to hear $1.88, while revenue was in line at $11.15 billion. It seems harsh on reflection, as the company’s move to cloud software has been an extremely successful one to date. If the share price falls to the low $230’s it will create a great buying opportunity.

Tesla (TSLA) also struggled, falling 5.01% on Friday after an unveiling of its new Model Y crossover vehicle underwhelmed investors. CEO Elon Musk claimed he expects to sell more model Y’s than all of the other Tesla models combined, however, commentators were concerned about the car’s production timelines and the deposit increase to $2,500 from the $1000 that was needed for the Model 3.

I will be fascinated to see how the sales go for the Y, and whether the car can actually outperform all previous models. Production will be crucial, as the Model 3 has been plagued with delays and setbacks, and buyers need to know that they will be receiving their cars on time. Hopefully, Tesla has learnt from their previous mistakes of over offering and under delivering – which needs to be the other way around if they are to deliver on their huge potential.

Now onto the week ahead.

While we’ll have eyes on yet another Brexit vote in the UK, and we’ll be waiting for any sort of news out of the US/China trade negotiations, the main focus of the week will be on the Federal Reserve meeting which concludes on Wednesday afternoon with their rate announcement quickly followed by a Jerome Powell press conference.

Everyone is locking in a no move – which is pretty obvious- but any market movements will happen depending on what Big J has to say about any future moves. More dovish talk will be welcomed by investors, while anything other than this may result in a Wall St wobble. We may also hear more about the Fed’s plans for bond buybacks.

Boeing will be in the news again. President Trump has told them to “figure it out fast”, which I’m pretty sure was already a top priority before the President spoke. The Bureau d’Enquetes ‘Analyses has the flight recorders and are investigating, but they have warned it could take many days before they have an answer for the waiting world.

Tilray (TLRY), the second biggest cannabis stock will report earnings this week. It will be yet another important result for the industry which is just finding its feet after legalisation in Canada and a host of US states. Tilray has focused on high-margin medicinal marijuana in the past, but now has deals with Anheuser-Busch InBev (BUD) and Novartis to get cannabis into the mainstream (so to speak). AB InBev is the worlds largest brewer and is the owner of such famous names as Budweiser, Becks, Stella, Corona, our very own VB – and one of my personal favourites, the Leffe Brune, try one and thank me later. They will be a great launching pad to get pot into the public consciousness.

Global postal experts FedEx (FDX) will also report on Tuesday. They’ve been under the pump from Amazon (AMZN) in 2018-19, as the world’s largest online retailer muscles in on the delivery space. Their share price is down nearly 30% over the last year, yet earnings results continue to impress. It will be interesting to see if they can do it again.

Memory chipmaker Micron Technology (MU) will report on Wednesday, while shoemaker and sports apparel leader Nike (NKE) will report their numbers on Thursday. Take a look below at further expected earnings this week and the full list of economic data.

Hope you all have a great week.

Cheers, Paul.

 

Earnings:

  • Monday: Tilray (TLRY)
  • Tuesday:  FedEx Corp (FDX), HD Supply Holdings (HDS), Michaels Cos (MIK), Smartsheet Inc (SMAR)
  • Wednesday: General Mills Inc (GIS), Guess Inc (GES), Micron Technology (MU), Williams-Sonoma (WSM)
  • Thursday:  Carnival Corp (CCL), Nike (NKE), Trans World Entertainment Corp (TWMC)
  • Friday: Tiffany & Co (TIF)

Economic Data:

  • Tuesday:  Housing starts, Factory Orders
  • Wednesday: Federal Reserve Announcement, Jerome Powell press conference
  • Thursday: Weekly jobless claims, Philly Fed index, Current account deficit, leading economic indicators
  • Friday: Markit manufacturing PMI, Markit services PMI, Existing home sales, Wholesale Inventories, Federal Budget.

 

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