Trading The US Inauguration

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This has been a busy week for foreign exchange traders with the USD trading on both sides of the ledger and in wide ranges. With the inauguration of Donald Trump later today, investors appear to be taking defensive positions against the US Dollar. Earlier in the week, Mr Trump was quoted as saying that he thought the USD was too strong and was at a level which hampered US exporters.
Not surprisingly, the USD Index dropped over 150 points on that news flash and is now sitting on support just below 101.00.
Since then, senior Trump advisors have been downplaying those comments by saying they were meant to be directed specifically toward the Chinese Yuan, and not as a general view of the Greenback.
With respect to comments from Donald Trump, the investment community will have to grapple with how to take these seemingly spirited and personal views. Clearly, some of his more strident positions taken during the campaign have been softened, but the market will be subjected to these unannounced twitter and press comments throughout his Presidency.
In the larger picture, of the numerous and complex factors that impact foreign exchange rates, the wishes and desires of elected officials don’t often seem to be particularly important. Our longer-term bullish view for the US Dollar is based on the divergence of monetary policy , the relative health of the US financial system, the domestic interest rate trajectory and the uncertainty of the European election results.
On balance, and in simple terms, we would like to be positioned into the US inauguration with a “Risk-Off” posture. This means looking at long USD positions against the all other G-7 currencies except the JPY, a long bias toward the US Treasuries (lower yields) and short US equities.
The AUD/USD traded about 1% higher on the week as Chinese Inflation and Retail Sales data gave the Aussie a lift. The pair is now pushing against a key resistance level near .7620, which will likely find selling pressure.

CSL: Fully Valued At Current Levels

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The share price of CSL jumped almost 14% to $115.90  this week after surprising the market with a big earnings upgrade.

After posting a first-half profit of about USD 800 million, CSL expects net profits for the year ending June 30th to grow between 18 to 20% on a constant currency basis. This forecast included a USD 20 million headwind from unfavorable currency conversions in the AUD/USD.

However, as positive as the headline and resultant share price rally appear, we suggest that this earnings news needs to be considered within a broader context.

18 months ago the F17 NPAT expectation was $ USD 1.7 billion, 6 months ago it was USD 1.5 billion and the first estimate 2 months ago was  USD 1.28 billion.

In essence, this week’s news that the profit outlook has been raised to USD 1.33 billion is considerably  lower than the earnings figures that  CSL was expecting just 6 months ago…….yet the share price has moved from $90.00 to $114.00.

Based on industry assessments about potential pockets of competition within the immunoglobulins area, the forward earnings trajectory could be revised again over the next few months.

As such, we consider CSL in the $114.00 to 120.00 price range to be full-valued.

Our Algo Engine triggered a buy signal at or near the recent lows of $92.

Chart – CSL

Softer Revenue From General Electric

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Shares in General Electric fell to a 1-month low of $30.30 after the company reported Q4 revenue which fell short of expectations.

The company’s Q4 earnings of 46 cents per share were in line with forecasts, but the revenue number of $33.08 billion was lower than the consensus estimate of $33.63 billion.

For calendar year 2016, GE delivered $1.49 of earnings per share, 1% organic growth and returned $30.5 billion to share holders through dividends and share buybacks.

We expect GE’s oil and gas operations merger with Baker Hughes will pay dividends throughout 2017 and would look for buyers to return near the November 4th support level at $27.50

It’s somewhat concerning the rollover in GE and likewise in top market cap US financials. We watch these signals closely as further evidence of structural share price weakness.

Our Algo Engine flagged the short signal setup in GE  at or near the recent high of $32.

Chart – GE

Wesfarmers: Coal versus Coles

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Given the number of diversified business units which make up Wesfarmers, we believe the most accurate method of share valuation is to look at performance of the sum of the businesses.

At this point, the valuation equation can be reduced to a simple question: Will the increased revenue from higher coal prices offset the loss of market share that Coles has given up to Woolworth’s?

We expect the resource division to generate first-half EBIT of $135 million, which is in the lower part of the $135-$140 million guidance band. Conversely, we have downgraded Coles’ sales growth which reflects industry checks suggesting Woolworth’s won the the Christmas-period grocery trade.

2017 forecast $69 billion, EBITDA $5.5 billion, net profit $2.8 billion, which will produce EPS of around $2.40 reflecting underlying growth of 5%. This places the stock on a forward P/E of 16X and a dividend yield of 5.5%.

US Earnings Update: AMEX and IBM

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Computer giant IBM announced Q4 earnings well above street estimates but lower revenue numbers pressured the stock price lower.

Big Blue reported non-GAAP earnings per share of $5.01 compared to the consensus figure of $4.88. Revenue for Q4 came in at $21.77 billion versus expectations of $21.66 billion. Cloud platform revenue continued to increase which allowed the firm to beat full-year estimates and reach $13.59 in annual earnings per share.

However, despite beating the the Q4 estimates for revenue, overall revenue growth has now dropped for the 19th consecutive quarter. This negative trajectory for overall earnings growth contributed to the sharp intra-day price reversal in IBM shares.

After trading as high as $171.15 after the headline announcement, shares closed lower on the day at $163.50. The next key technical level is found at the December low near $158.00.

American Express reported Q4 earnings which fell short of analysts’ expectations.

The credit card issuer posted adjusted earnings of 91 cents per share on quarterly revenue of $8.02 billion. The street expected earnings of 98 cents per share on revenue of $7.95 billion. In addition, net income fell 8% on a year-on-year basis to $825 million.

AMEX shares have rallied over 20% since hitting the October low of $60.00. We see the business environment improving for for the firm going into 2017. As such, we would expect to see good technical support in the $67.00 area.

 

Key US Earnings Reports

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Goldman Sachs surprised to the upside with Q4 EPS announced at $5.08, which was well above the market estimate of $4.73 and nearly 4 times the EPS of $1.27 reported a year ago. This was based on quarterly earnings of $8.17 billion versus forecasts of $7.76 billion.

Like other banks in the sector, Goldman benefited from a sharp uptick in trading activity. Net revenues from the institutional client services division were up 25% from a year ago, led by a 78% increase from the fixed-income, foreign exchange and commodities unit. Goldman shares closed down $1.45 at $234.

Citigroup had a mixed report with Q4 earnings beating expectations, but missing on their revenue figures. The banking giant announced EPS of $1.14 on revenue of $17.01 billion. Analysts were expecting EPS of $1.12 on revenue of $17.26 billion.

Trading revenue was higher at $3.20 billion, but considerably below the expectations of $3.45 billion. Fixed-income revenue also missed to the downside with Q4 reported at $2.21 billion verses an expected $2.83 billion number. Shares of Citigroup closed down 1.7% at $57.40, well below the one-year high of $61.50 posted January 4th.

Shares of NETFLIX posted an all-time high of $135.15 as earnings were marginally better than expectations, but the number of new subscribers increased sharply. The on-line entertainment company announced Q4 earnings of 15 cents per share on revenue of $2.48 billion.

These numbers were slightly better than the street’s forecast of 13 cents per share on revenue of of $2.47 billion.

More importantly, NETFLIX exceeded its own subscriber growth estimates by gaining 7.05 million new subscribers versus estimates of 5.2 million. This represents the biggest quarterly gain in the company’s history and triggered the initial rally in their shares. By the close, the share price had settle back to $133.25

RIO Tinto: Better Production Numbers

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Following on from our earlier report, mining giant Rio Tinto posted solid Q4 production results with several divisions slightly beating calendar year 2016 guidance and their flagship Iron Ore operations meeting expectations.

More important than the actual production results themselves has been the continued strength of the global commodity price environment, which is driving earnings expectations into a higher range.

As such, it’s reasonable to expect the increase  in cash flow from higher metal prices could see RIO surprise the market with a higher dividend or a share buyback in its upcoming annual result in February.

We expect the exceptional second half strength in Iron Ore, Coal and to a lesser degree base metals, will help to significantly boost the immediate earnings for RIO.

This increase in revenue has boosted our short-term earnings forecast, which has resulted in an increase in our near-term price target to $65.00.

 

Strong Demand For LNG

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With a 27% price increase since mid-November, LNG is one of the hottest commodities in the world.

New data on LNG rates show that the price of shipped natural gas for Asian delivery has jumped $1.95 per MMBtu to $9.20 per MMBtu.

A big part of the increased demand is coming from China, which saw its LNG imports rise to a record high of 47% in November as compared to the same time in 2015, to a total of 2.66 million tons.

South Korea was also reported as a big driver for LNG demand , with that nation buying cargoes to replace power generation lost during maintenance of four domestic nuclear power plants.

Our preferred energy names remain WPL, ORG & OSH.

Chart – OSH

 

US Retail Sales Post A Mixed Result

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Friday’s US Retail Sales report showed strong demand for automobiles and furniture, providing further evidence that the economy ended the fourth quarter with momentum at the retail level.

The Commerce Department reported that retail sales rose 0.6% in December after increasing by 0.2% in November. Sales were up 4.1% on a year-on-year basis from December 2015 and rose 3.3% for all of 2016 versus 2.3% for all of 2015.

The Core Retail sales figures, which exclude cars, gasoline, building materials and food, rose 0.2% after being flat in November.

The Core Sales data corresponds more closely with the consumer spending component of the GDP and printed below the 0.4% forecast. Despite the smaller gain in Core Retails sales, the consumer spending trend in the US remains solid.

Chart – HVN

This Week’s Key Earnings Reports

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US Financial markets will be closed on Monday for a bank holiday. After that, the rest of the week has several top financial names which will be reporting Q4 earnings. The dates and the street estimates for earnings and revenue are as follows:

Tuesday:    Morgan Stanley (65 cents/ $8.46 billion)

Wednesday: Goldman Sachs ($4.74/ $7.76 billion)

Citigroup           ($1.12/ $17.29 billion)

Thursday:   American Express ( 98 cents/ $7.95 billion)

IBM   ($4.89/ $21.70 billion)

Friday:     General Electric  ( 46 cents/ $33.94 billion)

With stock index prices pushing up against record highs, earnings reports will likely have to be flawless to match the market’s expectations. If any of these first-tier financial names post materially lower numbers, the risk is that the market may have gotten ahead of itself in the post-election rally.