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Friday, July 21, 2017

Focus on Earnings

Financial Review

Focus on Earnings

DOW – 31 = 21,580
SPX – 0.91 = 2472
NAS – 2 = 6387
RUT – 6 = 1435
10 Y – .03 2.23%
OIL – 1.25 = 45.67
GOLD + 10.50 = 1255.50
BITCOIN + 1.33% = 2703.19 USD
ETHEREUM + 3.41% = 221.94

Stocks pulled back from record highs earlier this week.  For the week, the Dow fell 0.3% but the S&P 500 is up 0.5% and the Nasdaq added 1.2%. The Nasdaq is coming off a 10-day string of gains, matching its longest streak since Feb. 24, 2015 – so a pullback today was overdue.

At long last, tech stocks have finally recovered all the losses they suffered during the bursting of the dotcom bubble in 2000. It only took 17 years. The S&P 500 Information Technology Index closed Wednesday at an all-time high of 992.3. In doing so, it broke the previous record of 988.5, which was set back in March 2000.

In the intervening years, tech shares had lost as much as 80% of their value before beginning the slow ascent back to the top of the market. That ultra-slow recovery highlights how long it can take stocks to come back from bubbles. Tech stocks in the S&P 500 index now trade at a price/earnings ratio of 18.4, according to FactSet, based on projected sector profits in the coming 12 months.

That means tech is now trading at a 28% premium to tech companies’ valuations over the past decade. To be sure, that’s nothing compared to the triple digit P/Es seen in the late 1990s.

The FANG stocks, (Facebook Apple, Amazon, Netflix, and Alphabet-Google) have rocketed up this year, rising nearly 40 percent, four times the gain of the S&P 500. And the trend doesn’t seem to be ending. The technology heavy Nasdaq Composite Index raced ahead of the broader S&P 500 again this week.

And yet as investors pile into the FANG stocks, one measure of the return investors can expect from those stocks has shrunk to a new low. As of the end of the second quarter, the average free cash-flow yield of the FANG stocks, based on the past 12 months, slid to just 1.4 percent. That’s less than half of what that measure was just two years ago and now nearly a full percentage point below the yield on a 10-year Treasury.

Tech is back to being the biggest sector in the market, representing about a quarter of the S&P 500. That’s still well below the one-third share of the market that tech stocks occupied in the late 1990s. But remember that this figure does not include several big stocks that the public regards as “tech” but that S&P classifies as “consumer discretionary” stocks — a list that includes Amazon, Priceline, and Netflix. Moreover, Tesla isn’t even in the S&P 500, despite being valued at more than $53 billion.

If you want to make money in the stock market, you’d better nail earnings season. The reason is simple: Quarterly results are exerting unprecedented influence over stock returns and, by extension, portfolio performance. In recent quarters, reporting companies have seen their shares move four times the normal daily average, the most in the past 18 years, according to data compiled by Goldman Sachs.

The punishment for missing earnings is also the harshest in almost two years. In the first quarter of this year, companies that fell short dropped more than 2.5% in a single day, on average, according to Wells Fargo data.

One possible explanation is the rise of passive investment vehicles such as exchange-traded funds and quant funds. By trading large swaths of the equity market, rather than individual stocks, participating investors are diluting the effects of specific company fundamentals during non-earnings periods. Then, once earnings season rolls around, stock prices are spring-loaded to react more sharply to any new information.

This ETF effect is compounded by how price-insensitive the traders who use them can be — buying and selling based on what their models tell them and ignoring valuations that might otherwise raise red flags. Goldman finds that the FAAMG group that has led the stock market’s latest rally to new highs — consisting of Facebook, Amazon, Apple, Microsoft, and Google — has been realizing more than 50% of its quarterly return during earnings week.

In addition, the tech, materials, and consumer discretionary sectors are also seeing more than 30% of their quarterly returns generated in the five days surrounding releases.

General Electric reported quarterly profits fell 57% to $1.2 billion, as sales in its oil and gas, transportation and lighting divisions fell. Outgoing GE boss Jeffrey Immelt said the company was working in a “slow-growth, volatile environment”. He said a cost-cutting plan and other measures should put the firm on track to hit profit targets for the year. GE is down about 19% year to date.

Honeywell reported a better-than-expected quarterly profit. Net income attributable to Honeywell increased 5.5 percent to $1.3 billion, or $1.80 per share, above expectations of $1.78 per share. Revenue rose about 1 percent to $10 billion, topping expectations of $9.8 billion.

Honeywell also raised the low end of its 2017 earnings per share forecast by 10 cents. Sales in Honeywell’s aerospace business, which activist investor Daniel Loeb wants to be spun off, fell about 3 percent to $3.67 billion in the quarter, but the drop was much smaller than forecast.

The Department of Labor ordered Wells Fargo to pay $575,000 and to rehire a whistleblower the bank had dismissed in September 2011 after the former employee raised concerns over the opening of customer accounts without their knowledge. Despite news reports and lawsuits claiming the bank had retaliated against whistle-blowers, an investigative report by the bank’s board of directors released in April found no pattern of retaliation.

The U.K. cabinet will accept the free movement of EU citizens for up to four years after Brexit as part of a transitional deal. The news comes after a meeting between Prime Minister Theresa May and British businesses, in which companies stepped up pressure to avoid a so-called hard Brexit.

Bank of America has chosen Dublin as its future European Union hub, the latest major financial services firm to outline its plans to deal with Brexit, Britain’s departure from the 28-nation bloc.

Many banks and financial firms have concentrated their European operations in London, taking advantage of deep and liquid markets as well as the wide variety of support industries that have built up in the British capital, including accountants and lawyers. But those companies now face the distinct possibility that they may no longer be able to serve European clients from London after Britain leaves the Euro Union.

With Britain as a member of the EU, companies based in the country have been able to sell financial products across the Continent under “passporting” rules, which allow a lender licensed in one member state to work throughout the European Union. That is no longer guaranteed when Britain leaves in 2019, so financial companies have been moving forward with contingency strategies, and Bank of America is the latest lender to announce its plans.

American and European authorities have shut down two of the largest online black markets, AlphaBay and Hansa Market, and arrested their operators. AlphaBay, the largest so-called dark net market, was taken down in early July at the same time the authorities arrested the reported founder of the site, Alexandre Cazes, a Canadian man who was living in Bangkok.

Cazes committed suicide in his jail cell shortly after he was arrested. After AlphaBay went down, users streamed to one of its largest competitors, Hansa Market. But on Thursday, the Dutch national police announced that they had taken control of Hansa Market in June and had been operating the site since then, monitoring the vendors and customers and gathering identifying details on those involved in the 50,000 transactions that took place.

AlphaBay and Hansa Market were successors to the first and most famous market operating on the so-called dark net, Silk Road, which the authorities took down in October 2013.

You’ve undoubtedly heard that, in reaction to the hiring of Anthony Scaramucci as communications director, Sean Spicer has resigned as White House Spokesperson (leaving the White House to find someone else to not give press briefings).

Sarah Huckabee Sanders will replace Spicer. Given the nature of Trump coverage—and Spicer’s outsized role in it—you probably heard about the resignation within ten seconds of it happening. Scaramucci said he hopes that press secretary Sean Spicer will go on “to make a tremendous amount of money.”

Stocks Shake Lows, but Still Negative on Close

Charles Schwab: On the Market
Posted: 7/21/2017 4:15 PM ET

Stocks Shake Lows, but Still Negative on Close

U.S. stocks finished the regular trading session well off the lows, but still in negative fashion amid a blank economic calendar, mixed earnings releases and lingering political and monetary policy uncertainty. The Street welcomed some upbeat results from Dow member Visa and Honeywell, while earnings releases from Dow components Microsoft and GE received some scrutiny. Treasuries and gold were higher. The U.S. dollar and crude oil prices moved to the downside. Overseas, European equities traded lower as the euro extended its recent rally.

The Dow Jones Industrial Average (DJIA) lost 32 points (0.1%) to 21,580, the S&P 500 Index was 1 point lower at 2,473, and the Nasdaq Composite decreased 2 points to 6,388. In moderate volume, 834 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil declined $1.15 to $45.77 per barrel and wholesale gasoline was $0.05 lower at $1.56 per gallon. Elsewhere, the Bloomberg gold spot price increased $9.66 to $1,254.15 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 93.94. Markets were mixed for the week, as the DJIA decreased 0.3%, the S&P 500 Index advanced 0.5% and the Nasdaq Composite gained 1.2%.

Dow member Visa Inc. (V $100) reported fiscal Q3 earnings-per-share (EPS) of $0.86, above the $0.81 FactSet estimate, as revenues rose 26.0% year-over-year (y/y) to $4.6 billion, topping the projected $4.4 billion. The company said its results reflect strong growth in payments volume, cross-border volume, and processed transactions, which were powered by economic tailwinds in the U.S. and globally. Shares traded higher.

Dow component Microsoft Corp. (MSFT $74) posted fiscal Q4 EPS of $0.83, or $0.98 ex-items, versus the projected $0.71, with revenues increasing 9.1% y/y to $24.7 billion, above the expected $24.3 billion. The company said innovation across its cloud platforms drove strong results this quarter. MSFT finished lower.

Dow member General Electric Co. (GE $26) announced Q2 profits of $0.15 per share, or $0.28 ex-items, compared to the expected $0.25, as revenues declined 12.0% y/y to $29.6 billion, topping the forecasted $29.1 billion. GE issued full-year EPS guidance that had a midpoint above expectations. Shares saw pressure as analysts expressed some concern about the company's revenue decline and its lack of a 2018 outlook as it transitions to new Chief Executive Officer John Flannery in August. 

eBay Inc. (EBAY $37) reported Q2 profits of $0.02 per share, or $0.45 ex-items, versus the $0.45 estimate, as revenues grew 4.0% y/y to $2.3 billion, roughly matching expectations. EBAY issued mixed Q3 guidance and reaffirmed its full-year outlook. Additionally, the company approved a $3.0 billion addition to its share repurchase program. Shares closed lower.

Honeywell International Inc. (HON $136) posted Q2 EPS of $1.80, versus the projected $1.78, with revenues rising 1.0% y/y to $10.1 billion, exceeding the estimated $9.9 billion. HON raised the lower end of its full-year earnings outlook and increased its revenue forecast. Shares traded higher. 

Bond yields continue to slip

Treasuries finished higher and the economic calendar  was void of any major releases today. The yield on the 2-year note dipped 1 basis point (bp) to 1.34%, while the yields on the 10-year note and the 30-year bond declined 2 bps to 2.24% and 2.81%, respectively.

Bond yields and the U.S. dollar slipped this week amid heightened political uncertainty and mixed economic data, while the markets grappled with recent dovish commentary from Fed Chair Janet Yellen and some confusion toward the European Central Bank after it left its monetary policy stance unchanged.

As such, Schwab's Chief Fixed Income Strategist Kathy Jones notes in her Bond Market Mid-Year Outlook: Redefining the Borders of 'Lower for Longer'in the second half of 2017, we expect 10-year Treasury yields to remain in a 2% to 2.5% range, consistent with the eight-year "lower for longer" theme in the bond market. Read more on the Fixed Income page at, where Kathy also discusses, Dollar Decline: Time to Shift to International Bonds? Maybe Not, on the Markets & Economy page. Follow Kathy on Twitter: @kathyjones.

Also, Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend discusses in his article, Washington Midyear Update: 4 Key Issues for Investors to Watch, dysfunction, drama and ethical issues in the White House have combined with Republican infighting on Capitol Hill to bog down the policy agenda. There's growing concern among congressional Republicans that the much-anticipated policy changes will need to be significantly scaled back—or that they may not happen at all. Read more on the Insights & Ideas page at, and be sure to follow us on Twitter: @schwabresearch.

The stock market's major indexes were mixed this week but remain near record highs and the Nasdaq has posted a string of gains lasting two weeks with the technology sector regaining some of its market-leading prowess, while the energy sector slipped as crude oil prices gave back some of a recent run. Healthcare issues finished with a solid weekly gain in the wake of the failed Senate healthcare reform bid and the pullback in bond yields weighed on financials, along with Dow member Goldman Sachs Group Inc's(GS $221) disappointing earnings report and despite upbeat earnings results from Morgan Stanley(MS $46). Netflix Inc. (NFLX $185) was a standout winner after posting blowout results. Thus far, of the 96 companies in the S&P 500 that have reported profit results, about 77% have bested revenue forecasts and approximately 81% have exceeded earnings expectations, per data compiled by Bloomberg.

Schwab's Chief Investment Strategist Liz Ann Sonders and Vice President of Trading and Derivatives, Randy Frederick offer their video, Is the Recent Upside in Market Performance Justified?, on the Insights & Ideas page at, where you can also find Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, latest Schwab Sector Views: One half down, one to go!on the Markets & Economy page. Follow Liz Ann and Randy on Twitter: @lizannsonders and @randyafrederick.

Next week's economic calendar  will continue to share the stage with ratcheted-up earnings season, but will deliver some key reports that may command attention. Existing and new home sales, Markit's business activity reports, and Consumer Confidence will precede the mid-week Fed monetary policy decision. However, with no updated economic projections and press conference, coupled with the recently perceived change in tone, the Central Bank is not expected to make any policy changes. The second half of the week will remain robust, with the first look (of three) at Q2 GDP, preliminary durable goods orders and the final University of Michigan Consumer Sentiment Index.

As noted in the latest Schwab Market Perspective: Are Danger Signs Rising…or Will the Bull Run Continue?, economic uncertainty has confounded the Fed, which may raise the risk of a policy mistake and/or bouts of market volatility, while putting the potential for another rate hike this year into greater doubt. We're sticking with our forecast for one more hike this year along with the start of a gradual reduction in their balance sheet, believing the latter could come before the former. The long running bull market continues to show remarkable resiliency and we expect that to continue. However, risks have risen and a pullback is likely but solid earnings growth should continue to support stocks. Read more on the Markets & Economy page at

Europe lower as euro extends rally after ECB decision, Asia mixed amid earnings

European equities finished lower in late-day action, with the euro adding to yesterday's rally that came as the European Central Bank (ECB) left its monetary policy unchanged and President Mario Draghi noted that talks of tapering its stimulus measures will begin in the fall. However, bond yields remained under pressure as Draghi also appeared to offer a more dovish tone than the markets had anticipated, fostering some confusion. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his article, Are bonds signaling a major stock market peak? on the Markets & Economy page at Follow Jeff on Twitter: @jeffreykleintop. The markets also grappled with heightened political uncertainty in the U.S. and the mixed reaction to the start of earnings season. Jeff and Schwab's Randy Frederick offer the video, Political Risk: How Should Investors Respond?, on the Insights & Ideas page at Losses for the telecommunications sector were limited by Vodafone Group PLC. (stronger-than-expected revenues. The British pound was flat versus the greenback.

Stocks in Asia finished mixed as the markets grappled with heightened political uncertainty in the U.S., mixed earnings results and unchanged monetary policy decisions yesterday from the Bank of Japan and European Central Bank, with the latter fostering some confusion in its statement. Japanese equities declined as the yen gained ground and Australian securities fell amid some dovish comments from a Reserve Bank of Australia member and weakness in basic materials issues. Shares trading in Hong Kong and mainland China dipped as traders digested recent upbeat economic data and regulatory concerns persisted. However, Indian stocks rose, remaining near all-time highs, and South Korean equities extended a record high winning streak. For a look at the global markets, see Schwab's Jeffrey Kleintop's CFA, The Long Period of Underperformance for Emerging Market Stocks May Finally Be Over on the International Investing page at, where you can also find his 2017 Mid-year Global Market Outlook: Broader Growth, Narrower Risks on the International Investing page.

International reports of note for next week include: Australia—CPI, PPI and trade data. Japan—Leading Index, jobless rate, household spending, CPI, PPI and retail sales. China—leading indicators and industrial profits. Eurozone—Markit Services and Manufacturing PMIs and consumer confidence and German CPI, import prices and Ifo business climate survey. U.K.—Q2 GDP, Index of Services and consumer confidence.