Financial Review with Sinclair Noe
DOW – 48 = 17,051
SPX – 4 = 1973
NAS – 7 = 4424
10 YR YLD - .01 = 2.47%
OIL + 1.46 = 104.59
GOLD + 1.30 = 1313.20
SILV + .04 = 21.03
SPX – 4 = 1973
NAS – 7 = 4424
10 YR YLD - .01 = 2.47%
OIL + 1.46 = 104.59
GOLD + 1.30 = 1313.20
SILV + .04 = 21.03
First leg:
Let us start with
earnings reporting season, which kicks into full gear this week with 140 of the
S&P 500 companies posting results.
Netflix reported a
profit of $71 million, or $1.15 a share, on revenue of $1.34 billion. This was
in line with expectations, but for Netflix, an important component is how fast
they are adding subscribers; turns out – fast; 1.69 million new net streamers
in the second quarter; 570,000 in the US and 1.12 million international
subscribers; now topping 50 million worldwide.
Allergan, the botox
company, posted better than expected 2Q profits and sales but also announced it
is cutting 1,500 jobs in a restructuring. BB&T, the southeastern
financial company, posted weak 2Q results as mortgage activity lagged; this has
been a theme among banks for the second quarter, but the bigger banks have been
compensating with profits in investment banking and trading; smaller, regional
banks find it harder to compete in that arena. Chipotle Mexican Grill, theme
park operator Six Flags, oilfield services company Halliburton, Manpower Group,
and chipmaker Texas Instruments all reported better than expected results.
Tomorrow we will get
the earnings report from McDonalds; after the close, we will get earnings from
Microsoft and Apple. Wednesday’s results include Facebook. Thursday we will
hear from General Motors and Amazon.com.
So far, earnings
season has been strong, of the S&P 500 companies that reported through the
end of last week, earnings are up 7.6% from the same period last year on 4.2%
higher revenues, with 65.9% beating EPS estimates and 68.2% coming out with
better than expected revenue. This is better performance than we have seen at
this stage in other recent reporting cycles. The +7.6% earnings growth at this
stage in Q2 compares to an earnings decline of -3% for the same group of
companies in Q1 On the revenue side, the +4.2% growth thus far compares to
growth rates of +1.7% and +3% in Q1. The earnings and revenue beat ratios for
these companies are similarly tracking better relative to Q1.
Second leg:
Israel and Hamas
continue to battle in the Gaza Strip and Russian separatists continue to impede
Malaysia Airlines Flight 17 investigation efforts. President Obama delivered a
statement this morning on the geopolitical hotspots. Secretary of State John
Kerry was dispatched to Cairo to discuss cease-fire negotiations with
international officials. Though Obama cited Israel’s “right to defend itself”
against Hamas missile strikes that now number in the thousands, he said he has
instructed Kerry to prioritize de-escalation.
Obama said
investigation efforts into what caused the crash of Malaysia Airlines Flight 17 have been impeded by pro-Russian
separatists, who have assumed control of the crash site and have begun removing
evidence. “Unfortunately, the Russian-backed separatists continue to block the
investigation,” Obama said of the militants. “All of which begs the question,
what exactly are they trying to hide?” Obama said responsibility lies with the
Russian government, and Russian President Vladimir Putin, to convince the
separatists to cooperate with an international investigation.
A train carrying the
remains of most of the almost 300 victims of the Malaysia Airlines plane downed
over Ukraine left the site on Monday, after the Malaysian Prime Minister
reached a deal with the leader of pro-Russian separatists controlling the area.
The aircraft's black boxes, which could hold information about the crash in
rebel-held eastern Ukraine, will be given to the Malaysian authorities.
At the United Nations,
the Security Council unanimously adopted a resolution demanding those
responsible "be held to account and that all states cooperate fully with
efforts to establish accountability". It also demanded that armed groups
allow "safe, secure, full and unrestricted access" to the crash site.
It will be difficult to use the forensic evidence at the site to determine
exactly what happened, but it is becoming increasingly obvious the plane was
shot down with Russian weaponry.
Clearly, Putin did not
want nearly 300 civilians to die, but it happened and it probably happened
because of things he set in motion. If Russia is even loosely tied to the
destruction of the passenger plane, even if it was an accident, the incident
could represent another escalation of Russian aggression and mark a major
turning point in how Russia is perceived around the world.
British Prime Minister
David Cameron will urge other European leaders to consider imposing tougher
sanctions Russian oil, gas, defense, and banking sectors at an EU meeting
tomorrow. However, EU diplomats made clear today that sectorial sanction would
still be extremely difficult for some of Europe's poorer nations. They are
especially nervous about the energy sector, central to the Russian economy, but
also to the European Union.
EU nations rely on
Russia for about 30% of their gas demand and have intertwined interests based
on decades of energy reliance. Russia exports around $60 billion a year in gas
and the Netherlands was Russia's biggest export destination last year, mostly
oil and metals. Energy sanctions would most likely derail the fragile European
recovery in general and might even lead to a complete economic collapse in
certain member states. Many Eurozone countries see sanctions as collective
economic suicide that helps no one. What they should see is that dependence on
imported fossil fuels has made them economically weak and subservient. As long
as the Eurozone relies on Russian gas to heat their homes in the winter, Putin
can get away with murder.
Third leg:
Financial markets have
been largely whistling past geopolitical hotspots, with just the occasional
jittery pullback. The simple fact is that the Federal Reserve and all other
global central banks have been providing the markets with unusually
accommodative monetary policy; which is to say, the central banks have been
throwing easy money at the markets. In addition, there is growing concern that
the continuation of this “unconventional” and “extraordinary” state of affairs
involves an entirely new set of risks.
Clearly, the Fed would
like to do what it can to prevent bubbles from forming while they hold off on
raising rates; it is a delicate balancing act. If the Fed raises rates too
soon, it risks a downturn in the economy, just as the Fed expects the economy
is ready for liftoff. If the Fed continues with its easy money policies it
risks the chance of bubbles; already Fed Chair Janet Yellen has acknowledged
pockets of overvaluation. Last week, during Humphrey Hawkins testimony of
Capitol Hill, Yellen singled out social media stocks and biotechs.
What does Yellen know
about social media and biotech valuations? Probably not a great amount, but
that doesn’t devalue her perspective; there may be some kind of asset bubble
taking shape in at least some corners of the financial market. Moreover, do not
think Yellen just tossed out the overvaluation comment in a flippant or offhand
manner. She is well aware of Alan Greenspan’s notorious remarks about
“irrational exuberance”. This was a chance for Yellen to jawbone the markets.
The very fact that she’s doing so means that she probably sees good reason for
speaking out.
Yellen knows she is
walking a very narrow line as she tries to guide monetary policy back toward
some kind of “new normal” for the first time since the 2008 financial crisis.
Yellen seemed to be saying that if small corners of the market over-inflate and
pop, well tough luck; it will not change the Fed’s path toward escape velocity.
You might want to buckle your seat belts and get ready for a bumpy ride.
One reason for the
overvaluation has been that the Fed has pumped up markets to such a point where
it has been a bad trade to try to fight the Fed, and this has removed normal
checks on overvaluation. Under normal market conditions, short sellers provide
the right amount of pessimism to temper the optimism that leads to a wildly
overvalued stock market. Short positions help keep companies with weak earnings
potential and bad management from riding the bull market herd mentality to
unjustifiably high share prices. However, this market is far from normal. The
stock market has climbed to fresh new highs, not today, but the Dow has hit
record highs 15 times this year, even with geopolitical hotspots and negative
first quarter GDP.
Short sellers are in
retreat. It’s hard to fight the Fed and a bull market. The proportion of shares
in short positions is at its lowest level since before the collapse of Lehman
Brothers, with short interest on the S&P 500 index hovering around 2%.
Shorting a stock
involves borrowing it from a broker at one price with the promise to return
those shares after a certain period. The short seller will then sell the
borrowed shares, and if the stock price goes down, they can buy them back,
return them to the broker, and pocket the difference. When shorting, the risk
is that the price goes up and you have to buy back the shares at a higher
price. Shorting can be a good way to make big money fast. If a stock drops 50%,
the short seller stands to make 100% on the trade; and when a stock starts to
fall, it can fall fast.
Some traders like to look at the charts for
short targets, and that is important; you never want to short a stock that is
in a strong uptrend; you want to wait for it to turn over. You can also look at
the fundamentals, and earnings season is a great time to look for really high
price to earnings ratios, heavy debt burdens, downward guidance, or anything
else that might raise a red flag. It is good to remember shorting, especially
if one of the three legs starts to wobble.
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