Earnings, Rail Traffic & Summertime Heat

By Jeff Kelly on July 19, 2019

The equity markets have entered the teeth of earnings season. The good news is expectations are dramatically lowered. The bad news is expectations are still not low enough for some companies. Both Netflix and CSX reported this week and saw their stocks decline significantly. Given the decline in rail traffic we’ve shown each week, it’s not surprising CSX missed their numbers. On the other hand, we saw a great report from Microsoft.

I think this will be the pattern for the earnings season. Some reports will be great – software and retail look good. Others, more capital intensive areas, will struggle. If the companies can show better times are coming the declines will be short lived.

Goldman Sachs recently put out a piece on the difficulty in calculating the correct GDP numbers (Goldman Says U.S. Growth May Be Undermeasured by a Full Point.) They say that the government numbers may be understating growth by one full percent. Given how much can be done today with smart phones, the cloud they could be right.

Meanwhile it’s Friday and I feel a bit like Alfie does!

***This is not a recommendation to buy/sell Netflix, CSX or Microsoft. 

Charts From The Week Past

The credit markets drive the equity markets. We aren’t like to see equity markets deteriorate significantly without seeing some stress in credit.

Let’s look at some snippets from a Bloomberg Weekly Credit Brief. These stats don’t show any stress.

• Distressed debt investors have about 80 billion of cash to invest, almost enough to buy the entire US market for troubled debt at face value. Remember distressed debt is never bought at face value.
• A Bloomberg Index of U.S. Corporate Bankruptcy fillings has fallen 20% since March.
• Approximately 15 billion of new high yield issuance has been done in July. This puts July on pace to be the busiest in 5 years.

Sources: Bloomberg Brief, Preqin Data

The conference board leading indicators comes in negative for June.

This is a ugly reading. Could it be another reason for rate cuts?

Sources: Bloomberg, Conference Board

There were more soft auto sales in June.

Could ride sharing services and kids getting their licenses later be permanently cutting into sales?

Source: Desrosiers Auto Consultants

The expectation for a 50 basis-point rate cut has risen significantly. 

Sources: Bloomberg, Daily Shot

There was a nice uptick in the Philly Fed General Business Conditions Index.

This is the best reading since July 2018.

Source: Bespoke

American Association of Individual Investors publishes their sentiment index each Thursday. Those classifying themselves as bullish rose to almost 36%.

This is higher, but not yet at levels that have caused problems in the past.

Sources: Bloomberg, AAII

Here is a look at the correlation between hedge funds and the S&P 500 – it’s close to .9.

This means hedge funds are tracking the moves of the S&P 500 with a 90% correlation, or put another way, they are not hedging. They are more like leveraged long funds.

Source: Bloomberg

Rail traffic is still looking poor.

As such, CSX’s poor performance will likely persist until some of the trade disputes are resolved.

Source: Railfax

Only a short time ago we were reducing CO2 emissions.

Now, we are increasing at an alarming rate.

Source: BP Statistical Review of World Energy, June 2019

Boeing is going to report an ugly loss, but the stock rallied on this news. 

***This is not a recommendation to buy/sell Boeing. 

Sources: S&P Global IQ Database, Boeing, Seattle Times

China continues to sell U.S. Treasuries.

Their holdings are now at the lowest levels since May 2017.

Sources: Treasury Department, Bloomberg

Singapore exports plunged 17.3% in June for biggest drop in six years.

Insights from Singapore’s first Financial Wellness Index by OCBC – “Wednesday’s exports report showed electronic shipments plunged by 31.9 percent last month, extending a 31.6 percent drop the month before – dragged by shipments of integrated circuits, personal computers and disk media products.  ‘The ongoing squabble between South Korea and Japan does not help matters either.'”

Sources: Refinitiv, FT

There isn’t much in the way of expectations as we get into the meat of earnings season.

In fact, expectations are the lowest they’ve been in 10 years. This can help companies paint poor earnings with the “better than expected” brush.

Source: BofA Merrill Lynch Regional Fund Manager Survey

German factory orders took another hit after a brief respite.

Poor auto sales aren’t good for Germany’s export driven economy.

Source: Federal Statistical Office

Weekend Homework

Invest Like the Best: Bill Gurley – All Things Business and Investing – A partner at Benchmark Capital, Bill Gurley is widely considered one of the best Venture Capitalists of all time. In this conversation on Invest Like the Best, Bill and Patrick discuss everything from the state of the IPO market, to network effects, marketplaces, and the impact of technology on investing. Outside of investing, Bill also offers his thoughts on the importance of mentor-ship and honing your craft.

As lawyers zero in on drug companies, a reckoning may be coming – “The opioid litigation is now larger in scope than the tobacco litigation of the 1980s, which resulted in a $246 billion settlement over 25 years.” Some of the numbers and statistics here are staggering. It’s not just the dollar amounts, but the number of pills prescribed in small areas. This is a major story building momentum.

A summer Friday and it’s hot everywhere. I hope you can enjoy the weekend relaxing with some cool beverages and friends. Have a great one!