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Daily Newsletter, Monday, 4/15/2019

Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

No Conviction

by Jim Brown

Click here to email Jim Brown

The market faded on lack of interest to produce the lowest volume day of the year.

Market Statistics

Investors are showing a complete lack of interest in the early stages of the earnings cycle. Volume of only 5.8 billion was the lowest nonholiday volume of the year. Decliners outpaced advancers 4,461 to 3,087 but the Dow and S&P remained mostly flat with minimal declines.

The Nasdaq took an early morning dive but recovered into the close. Netflix and Nvidia were the biggest early losers.



The economics were good and Fed commentary was positive. The NY Empire Manufacturing Survey for April came in at 10.1, up from 3.7 in March and well over the 6.7 analysts expected. This was the highest reading in 2019. Unfortunately, it is still below the highs at 20+ in late 2018.

New orders rose from 3.0 to 7.5 and inventories rose from zero to 8.4. Backorders slipped slightly from 2.2 to -0.7 and employment fell from 13.8 to 11.9. On the positive side prices paid declined from 34.1 to 27.3 but unfortunately prices received declined from 18.1 to 14.0.

The worst component was the six-month expectations which fell from 29.6 to 12.4. There has only been one weaker month (January 2016) since the recession. You have to wonder what is depressing sentiment so badly? Is it the result of consumer flight out of New York after the changes in the tax law? Or is it the continuing tariffs on Chinese goods. With employment still strong nationwide there is something unique to New York that is depressing expectations.


In an early morning interview, Chicago Fed president Charles Evans said he could see the Fed remaining on the sidelines until late in 2020. The market was so bored, investors did not react. This is good long-term news but it is only one Fed speaker.

Tomorrow we have industrial production and the NAHB housing index. Neither are market movers. The Beige Book on Wednesday is important but is not expected to show a material change.

If we got a nice positive surprise on the Philly Fed survey on Thursday, that could lift sentiment. That is the most important of the regional reports.

The market is closed on Friday and there will be no newsletter on Thursday evening.


Tuesday is a big day for earnings with IBM, Netflix, Bank America, Johnson & Johnson, Progressive, UnitedHealth and United Airlines. That is the highlights for the week as the activity slows ahead of the long weekend. Next week will be hectic. More than 80% of the S&P reports over the next two weeks.


Leading the earnings parade this morning was Goldman Sachs. The bank reported earnings of $5.71 that was well below the $6.95 in the year ago quarter but easily beat the $4.89 consensus estimates. Revenue declined from $10.08 billion to $8.81 billion and missed estimates for $8.93 billion. Revenue from institutional clients declined from $4.39 billion to $3.61 billion and missed consensus for $3.89 billion. Revenue from equities was $1.77 billion and missed estimates for $1.81 billion.

Despite the declines in revenue they managed to beat the estimates on earnings by reducing expenses, reducing head counts and eliminating old technology. They will also shift more operations to low-cost operational hubs. Goldman expects to save $1 in expenses for every $100 in revenue. They said they had reduced their long dated fixed income derivative assets by 40% since 2013. They are involved in a long-term restructuring and they do not disclose what assets they are holding and trying to sell. They are planning on increasing retail consumer deposits by $10 billion a year.


Citigroup (C) reported earnings of $1.87 that beat estimates for $1.80. Revenue of $18.6 billion declined slightly and matched consensus estimates. Global banking revenue rose to $8.451 billion. Institutional revenue declined fractionally to $9.694 billion. Loan balances rose 1% to $682 billion. Equity market revenue declined -24% to $842 million while fixed income trading rose 1% to $3.5 billion. Loan loss provisions declined slightly from $12.4 billion to $12.3 billion.

Overall it was a positive report but there is just no excitement in the banking sector. Citi shares were flat for the day.


Charles Schwab (SCHW) shares rose at the open after the company reported earnings of 69 cents that beat estimates for 66 cents. Revenue rose 14% to $2.72 billion and beat estimated for $2.68 billion. They added 386,000 brokerage accounts during the quarter. Core assets rose 6% to $51.7 billion. Total client assets rose 8% to $3.59 trillion. Yes, trillion with a T. The average number of daily trades fell 10% to 418,000. Shares rose $1.50 at the open but sank to close with a 32-cent loss.


JB Hunt Transport Service (JBHT) fell $5 in after hours trading after reporting $1.09 in earnings and missing estimates for $1.25. Revenue rose 7% to $2.09 billion thanks to an 11% rise in prices but there was a 7% decline in volumes. Analysts had expected $2.2 billion in revenue.


Nvidia shares fell sharply at the open on no news. The Semiconductor Index has been making new highs, but that trend ended today. There was nothing in the sector that I saw to trigger profit taking. There are continued warnings over the slowdown in smartphone sales that could approach 20% this quarter but there is no hard evidence. Apple shares posted a small gain but cannot seem to break over that $200 level.


Spotify (SPOT) shares declined sharply after rumors broke that Amazon was going to offer a free music service over its Alexa devices. We heard last week that subscriptions to Apple Music had exceeded those to Spotify, so it is no surprise the shares were weak. The free service from Amazon could be available as early as this week. Amazon also has its unlimited music service for $7.99 per month to prime subscribers and $9.99 per month to everyone else.


AT&T (T) said it sold back its 9.5% stake in Hulu for $1.43 billion. This values Hulu at $15 billion. Disney is a big shareholder in Hulu and valued the company at $9.2 billion in November. Hulu is owned by a group of entertainment companies with Disney at 60% and Comcast 30%. Disney gained 30% when it bought Fox. AT&T said it was going to use the proceeds to reduce debt. AT&T shares are dead money.


Healthcare stocks rebounded after the ridiculous decline late last week on the Medicare for All news. Even if everything went perfectly right for Bernie Sanders and he was elected president, he still could not get this program approved in the House and Senate. The cost is $3.3 trillion and would end corporate and private health insurance. Friday was a buying opportunity. We added UnitedHealth in the LEAPS newsletter at the open today.



Electronics for Imaging (EFII) said it had agreed to be acquired by PE firm Siris Capital Group LLC for $1.7 billion. Siris will pay $37 per share in cash, a 26% premium over Friday's close. The CEO said this transaction provides immediate benefit to existing shareholders and adds a partner that can add strategic and operational expertise to our business. Shares rose 29% to $38 suggesting somebody is expecting a higher bid.


Catalant Inc (CTLT) shares surged after they agreed to acquire a leader in gene therapy, Paragon Bioservices for $1.2 billion. This is an all cash deal and is expected to close in Q2. This will boost the gene therapy abilities of the combined companies and accelerate new developments.


Crude prices were dormant today, just like the equity market. Traders must have left early for the three-day weekend.



Markets

Never short a dull market. Other than Friday's headline generated short squeeze this has been a dull market. Four of the last six days have seen the lowest volume of the year with today the nonholiday low for 2019. Since this is technically a holiday week, I do not expect volume to increase significantly unless there is a major headline. While I expect the markets to retest their highs, there is no reason to rush into new positions. There is something weighing on investors and it could be fears of a sell the news event at the new highs or worries that Q1 earnings are going to fall flat. Today's earnings were nothing to excite cautious traders.

Typically, the S&P rises about 1.5% in the two weeks following Tax Day. That could be due to earnings or just the relief of knowing what you owed in taxes and have gotten that behind you. Now all the money in your account belongs to you and you have another year before Uncle Sam reaches back into your account. Last year was an outlier with a 2.9% decline in the two weeks after April 15th.

Nothing has change since Friday. The S&P lost 2 points. Clearly that is not a big deal. The index is now 25 points from a new high and could make that leap in one day if investors were squeezed again. With earnings estimates negative and the potential for IBM and NFLX to disappoint on Tuesday, I can understand why investors are cautious about being overly long.


Goldman was the biggest drag on the Dow, but that loss was offset by the rebound in UnitedHealth. The tariff targets, CAT, MMM, BA, were all it the loser column today despite a lack of negative news. Other than the morning dip the Dow has been relatively flat for the last two days. Eventually this will change, and I hope we will not be wishing for flat because that would mean the index is going lower. Prior resistance at 26,191 should now be support.



The tech sector remains the best performer despite the 60-point intraday drop. The index recovered and is only 133 points from a new high. The FANG stocks are mostly positive with the exception of Netflix. After Disney's streaming announcement last week, the Netflix earnings on Tuesday after the close are going to be even more important. If options were not so expensive, I would take a chance on a Netflix call and hold over earnings. There is a 100% chance the stock will move over $5 but there is a zero percent chance of me picking the right direction. I think their earnings will be positive, but it is still a wild card.

Assuming Netflix does not disappoint and drop $20 overnight, the Nasdaq could move a little closer to its prior high at 8,109.





The small cap Russell 2000 remains the laggard. The index was the biggest loser, but it was only 5 points. It remains stuck over the 200-day and below 1,600. Small caps are supposed to lead the market and it is not happening. That should suggest caution is advised.


I believe the markets will retest their highs but as I have been saying for the last several weeks, I am concerned about a potential sell the news event when those highs are reached. Maybe not immediately, but in the days that follow. The China trade agreement is old news and priced into the market. If earnings do not improve significantly along with guidance, we could have an early slide into the summer doldrums. Sell in May and go away, come back again after Labor Day. I am not saying that is going to happen, but I think we have a better than 50:50 chance of a summer decline.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Standoff

by Jim Brown

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Editor's Note

The buyers and sellers have battled to a standoff with neither having any conviction. The buyers do not have enough volume to lift the market but they are still nibbling on the dips. The sellers have enough power to keep stocks from advancing but they cannot push them materially lower. The low volume confirms the lack of conviction by either side. This is slightly bearish because investors should be a little more excited about the earnings cycle. The lack of excitement suggests the bears could gain the upper hand once the earnings fade.

 

New positions are only added on Wednesday and Saturday except in special circumstances.


NEW BULLISH Plays

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NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Biggest Loser

by Jim Brown

Click here to email Jim Brown