foxex: What's Lurking?

The Market Sum | INVESTOPEDIA

Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. Markets continue to rally as trade hopes brighten. Will things stay sunny?

Markets Close

Dow
23,879.12 +0.39%

S&P
2,584.96 +0.41%

Nasdaq
6,957.08 +0.87%

VIX
19.81 -3.22%

INV Anxiety Index
103.11 High Anxiety

US 10-Yr Yield
2.728 +0.44%

What could scare off this rally? Earnings Season

Make that four days in a row of market gains. The trend is undeniable but the rally is still very young and very fragile. Buyers are back in and lower valuations for stocks are making them look attractive right now. It helps that the trade negotiations between Beijing and Washington appear to be going well and extended an additional day. There is still a long way to go, but the talks seem to be productive. It also helps that the Federal Reserve is taking a more measured approach to rate hikes, and the probability of future hikes has come way down, according to FedWatch.

Today the Fed released the 'minutes' from its most recent meeting in December when it raised rates 0.25%. If you skim to the end, you'll find this key paragraph:

The Committee judges that some further gradual increases in the target
range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term. The Committee judges that risks to the economic outlook are roughly balanced, but will continue
to monitor global economic and financial developments and assess their implications for the economic outlook.

Translation: The Fed is going to chill for a few to see how things play out.

Still, there are still plenty of market risks in the wind. The big one - at the moment - is earnings. Earning season will kick off next week but we have already heard profit and revenue warnings from some very important companies. Here is a quick list:

Apple - When Tim Cook brought down sales guidance by $9 billion for the prior quarter, the earth glitched and stocks tanked.
Samsung followed on Monday - Apple's chief rival in the smartphone business
Constellation Brands warned today of slowing sales, brought on by weakness in the low-end wine market. It also wrote down its investment in cannabis company Canopy Growth by $164 million as it has yet to add to Constellation's revenue growth and is a drag on profits. Turns out cheap wine and marijuana apparently don't mix very well. Who knew? James has more below in the chart of the day.
Micron - The chipmaker warned in December of slowing demand for memory chips. Micron's big customers include Microsoft, Google and Cisco Systems, so if Micron is warning...

Why it Matters

Nothing rattles investors like profit and revenue warnings. It's like a bad flu that can spread across sectors or entire markets. Those warnings started in late November and continued through December, which explains the dramatic selloff we experienced.

Yardeni and Associates tracks earnings revisions across all sectors and countries and shared this chart.

Those are net earnings revisions going all the way back to 1995. The big drop was during the financial crisis, for obvious reasons. If you look at late November and December, the drop is pronounced and not nearly as severe. But it was bad enough to bring on a correction and a near bear market. We still might get that bear market even though we've had a 10% rally in the S&P 500 since Christmas Eve. Stay vigilant.

What's Next

Earnings season kicks off next week with notable companies like JPMorgan and Netflix reporting. JPMorgan will give us a sense of how strong lending and financing activity is across the world. Jamie Dimon said recently that the economy is healthier than everyone thinks and rumors of a recession were premature. That's a good sign.

Beyond earnings, we'll get a read on the health of the U.S. consumer on Friday when the Consumer Price index is released. It's backward looking, but it does paint a clear picture as whether inflation is creeping or not. The Fed doesn't think it is, for now. If the December CPI number is higher than anticipated (think 2+%), the Fed may not be willing to wait and see much longer. So far so good, though.

Oh and the Government shutdown. It's still happening and it's an embarrassment. Federal employees deserve better.

Here's some notable headlines

Sears Chairman Eddie Lampert to work on a higher bid to keep Sears alive

This is tough to watch.

Oil Bounces Back to Bull Market Fueled by OPEC Cuts, Trade Talks

Oil's up more than 20% since Xmas Eve.

Netflix to Bow to Saudi Censors Comes at a Cost to Free Speech

Netflix removed an episode of Hasan Minhaj's "Patriot Act" about Saudi Arabia from its service in Saudi Arabia, per the nation's request. A couple months ago there was an op-ed piece about Saudi influence in Silicon Valley. Worth revisiting. Link here:

Silicon Valley's Saudi Arabia Problem

Chart of the Day: Canopy Growth Flies High as Constellation Brands Tanks

The short-term chart above tells the whole story. Shares of Canadian marijuana producer and marketer, Canopy Growth (CGC), have been flying high on Wednesday due in large part to the company's (and the industry's) growing legitimacy on Wall Street. Piper Jaffray initiated coverage on Canopy with an overweight rating alongside another Canadian cannabis company, Tilray. Canopy Growth is a pure-play cannabis stock that owns and operates several different brands, and produces/markets both medical and recreational strains of marijuana. The company is also in the process of developing a THC-infused beverage that may compete with alcoholic beverages.

This brings us to Constellation Brands (STZ), which owns such prominent alcoholic beverage brands as Corona beer, Robert Mondavi wines, and Svedka Vodka. The company recently announced a $4 billion investment in Canopy Growth as it looked to diversify its portfolio away from solely alcoholic beverages. STZ shares dropped sharply on Wednesday after its earnings outlook disappointed investors. The company expects its wine and spirits business to take a hit in 2019. In addition, its investment in Canopy Growth is seen as a long-term play, and since the investment was financed with debt, interest expenses will likely reduce its EPS substantially.