S&P 500 Update

Posted on | by Todd | Leave a Comment on S&P 500 Update

The Standard and Poor’s 500 index is a widely followed indicator of the general direction of the US stock market, and by extension, global equity markets.

The reason for the wide following is clear. The S&P 500 comprises 505 common stocks and covers 80% of the American equity market on a capitalization basis.

However, so far this year, the S&P 500 index has had wide intra-day ranges but has gone practically nowhere. It finished the fist week of the year near 2277 and at 2275 in the second. It finished last week near 2274.

The technical indicators are not generating clear signals with the 30-day moving average being tested over the last 4 sessions but not broken.

The prospects of business-friendly policies from the Trump administration may be helping to support the market , while fear that much of the good news has already been discounted in the market has tempered enthusiasm for new buyers.

It’s our view that this indecision pattern will be resolved as the US earnings season moves into its second full week. At this point, the risk remains asymmetrically to the downside on weaker earnings reports, versus the upside potential on better-than-expected reports.

Softer Revenue From General Electric

Posted on | by Todd | Leave a Comment on Softer Revenue From General Electric

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

Posted on | by Todd | Leave a Comment on US Earnings Update: AMEX and IBM

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

US Banks – Technical Update

Posted on | by Leon Hinde | Leave a Comment on US Banks – Technical Update

Dow Jones large cap financials JP Morgan & Goldman Sachs were down 3.63% and 3.5% respectively in overnight trade.

The charts below show the price action rolling-over in the past few trading sessions, following the earnings results on Friday that failed to meet market expectations on the revenue front.

This will have ongoing implications for ASX banking stocks. The rally in domestic bank shares were mainly a by-product of the US banking share rally, rather than factors directly related to an earnings pickup within the Australian market.

Chart – JP Morgan

 

Chart – Goldman Sachs

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

US Bank Earnings Preview

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The fourth quarter earnings season kicks into high gear this week when the first of the major US banks report tomorrow night. Expectations are mixed, based on forecasts that include the impact of the FED raising interest rates and the Presidential election.

Bank of America and JP Morgan are both expected to report solid bottom-line growth. On the other hand, Wells Fargo is expected to say that its earnings have slipped from a year ago.

Below is a quick overview of what is expected from these three banks.

BoA Q4 profit is expected to come in at 38 cents per share, which would be close to a 30% gain from the year-ago period. The consensus has earnings pegged at 40 cents per share.

JP Morgan is expected to announce it had earnings of $1.47 per share, which would be up from $1.32 per share a year-ago on revenue of $23.70 billion.

Wells Fargo is expected to post Q4 EPS of $1.00 per share which is down three cents from a year ago on revenue of just over $22.00 billion.

US Wages and Inflation

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The US Federal Reserve officially ended their stimulative policy of Quantitative Easing (QE) on October 29, 2014.

Since then, investors have been following the monthly Non-Farm Payroll (NFP) report for insight about how the condition of the US Labor market would influence US interest policy, the US Stock market and the US Dollar.

Within the NFP report, the three main components are the headline new job creation, the un-employment rate and weekly hourly earnings.

For most investors, the headline new jobs data has been the key metric for gauging whether the FED was likely to lift rates or leave policy on hold.

However, as the US is reaching a full-employment zone and the unemployment rate is nearing its lower bound below 5%, we are seeing a change in the policy implication dynamic towards wage growth and its impact on inflation.

Since the FED first lifted the FED Funds target rate in December 2015, the 10-year note yield has risen from 1.30% to 2.50%.

The FED understands that US wage growth is feeding directly into core inflation aggregates and will likely  shift their policy-making focus away from new job creation to wage growth during 2017.

In last Friday’s NFP report, wages rose .4% for a new cyclical high on a year-on-year basis to 2.9%. This is the fastest pace since 2009. We see the importance of the wage component increasing through the year as the knock-on effect into core inflation is seen in subsequent data sets.

In other words, as we move further into 2017, it’s reasonable to expect investors may be taking positions in the US stocks, bonds and the US Dollar based more on the growth of weekly wages than the number of new jobs created.

On balance, we consider the recent rise in wages as a transitory event which may trigger short term headwinds to the recent stock market rally. Over the longer-term, we still consider the Bull market in stocks to continue with a gradual rise in 10-year yields.

 

Crude Oil Dumps on Iraqi Export Data

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The price of West Texas Intermediate (WTI) crude oil dropped over $2.00, or 3.8%, to $51.90 in New York trade as Iraqi exports posted a record high for the month of December.

This is the biggest daily drop in over five weeks as investors are now concerned about Iraqi compliance with the OPEC production cuts agreed to on November 30th in Vienna.

Crude Oil posted its biggest gain since 2009 last year, largely based on the agreement from OPEC and 11 other countries to curb output starting January 1st.

Non-compliance has been a recurring theme in previous OPEC agreements, and the Iraqi export data may be the first sign of a crack in the most recent production accord.

The close below $52.00 in the front month WTI contract is the first trade below the 30-day moving average in over a month and suggests further downside extension below $51.50.

On the ASX, Oil Search (OSH) reached a 2 month high of $7.45 yesterday but will likely trade lower today. Technically, we look for initial support at $7.00 with the Pre-OPEC key support level at $6.40.