A Sea of Green!

A sea of green! Stocks rallied yesterday on news of a US-China face-to-face meeting and upbeat earnings.  Traders were too excited to focus on anything bad yesterday, pushing stocks up close to their all time highs.

 

 

MY TWO CENTS

 

  1.  It really does come down to earnings.  Yesterday’s market action was partially driven by news that US trade reps will visit with their counterparts next week in China, but what really gave the market its legs was earnings.  I talk a lot about how companies can dress up the earnings and set low expectations only to “surprise” investors with better than expected results, but that doesn’t mean that they are not hitting the mark.  When looking at a company it is critical to look beyond the actual earnings per share and focus on the quality of those earnings.  By quality, I am referring to how the company got there.  Are companies’ strategies playing out as expected, such as was the case yesterday with Coca Cola’s beat and positive forward guidance?  Are their earnings diversified enough to handle trade hiccups, currency swings, recessions…  What about lower interest rates?  Clearly some companies will benefit from lower borrowing costs while others (specifically those who lend) will suffer from margin compression.  Stepping beyond the actual companies, one must observe the macro data affecting a company or its industry group.  Even though they were largely ignored, yesterday’s economic releases didn’t paint a good picture for some sectors.  In housing, Existing Home Sales fell by -1.7% after growing by +2.9% last month, missing expectations. This adds to a growing trend of weakness for the sector.  In manufacturing, the Richmond Federal Reserve Manufacturing Index came in at -12, missing expectations representing the largest monthly drop… on record.  There is clearly something going on in manufacturing which needs to be factored into company analysis.  Today we will hear from Facebook after the bell and they are expected to earn $1.88 / share.  An earnings beat may not be good enough to propel the stock forward due to the many external factors facing the company.  WHILE YOU SLEPT, the Department of Justice announced that it is opening an anti-trust investigation into as yet unnamed US technology giants with online platforms.  Clearly Facebook will be on that list along with Google and Amazon.  Those stocks all traded off in the pre-market, pinning down the tech heavy NASDAQ.  The moral of the story is: before you jump on the band wagon with individual stocks, a little homework will avoid a lot of pain.

 

  1.  BOJO: in, UK: out!  As was largely expected, Boris Johnson was named as UK’s new Prime Minister yesterday.  Theresa May will hand her resignation to Queen Elizabeth today and pass the gavel to Johnson.  Boris Johnson is a long EU critic and was at the forefront of the BREXIT movement.  He is not a fan of the US either.  Born in New York city to British parents, Johnson had duel citizenship… until he renounced it in 2016 (fun fact).  The important thing to note here is that Johnson is a BREXITEER and will ensure that the UK gets out of the EU promptly.  He is acting quickly announcing his BREXIT team WHILE YOU SLEPT, including BREXIT hardliner Priti Patel.  Johnson’s appointment and fervor increases the chances of a hard BREXIT, which is not good for UK companies or their EU counterparts, to be sure.

 

THE MARKETS

 

Stocks soared on strong earnings and news that trade talks with China are back on.  Bad economic data did not spoil the party as the S&P 500 climbed by +0.68%, the Dow Jones Industrial Average jumped by +0.65%, the Russel 2000 advanced by +0.66%, and the NASDAQ 100 traded up by +0.63%.  Bonds traded off pushing 10-year yields up by +4 basis points to 2.08%.  The dollar climbed a bit as the EU central bank prepares to announce its monetary policy, which may include stimulus.

 

WHAT’S NXT

 

– This morning we will get Markit Manufacturing PMI which is expected to come in at 51.0, up from last months 50.6.  This is important as many economists are concerned about increasingly weak manufacturing data.  See MY TWO CENTS above.

–  We will get some more housing data from the Census Bureau with New Home Sales, which is expected to have grown by +5.1% month over month compared to last month’s decline of -7.8%

–  The treasury will sell $41 billion 5-year notes.

–  41 S&P 500 companies will announce earnings today.  Before the bell we will hear from AT&T, Northrop Grumman, PayPal, General Dynamics, Boeing, and Caterpillar, amongst many others.  After the bell earnings include Ford, Tesla, Facebook, and Equifax.

daily chartbook 2019-07-24

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