 The Market Sum | Insight after the bell
By Caleb Silver, Editor in Chief Monday's Headlines 1. Markets end Mixed. Pinterest prepares to IPO and Earnings Season Kicks in. Markets Close
 Mixed Day for U.S. Markets The Dow Jones Industrials were weak all day and closed down 80 points as shares of Boeing and General Electric led the Index lower. Both stocks were downgraded by analysts who have grown pessimistic over Boeing's ability to resume production of the 737 Max jet and GE's ability to shed non-performing assets fast enough to grow its core businesses.
Earnings in Focus It's time for company report cards to be sent home to investors, and this earnings season is under the microscope. The investment community has been bracing itself for a decline in corporate earnings now that the 2017 corporate tax breaks made their way through company balance sheets last year, and global economic growth is slowing. We've known all these things would factor into corporate performance in 2019, but this is our first opportunity to see just how big their impact was in the first quarter of the year.
According to Morgan Stanley's research team, this is expected to be the first quarter of negative year-over-year earnings growth since the 2015-16 earnings recession. Overall corporate earnings for companies in the S&P 500 (there are actually 505 companies in that index, by the way) are expected to shrink 4%. Morgan Stanley is predicting another 'earnings recession', which is defined as two or more quarters of flat or negative growth.
This is what that looks like in chart-form: 
Why it Matters Earnings, which is another word for 'profit', is what stock prices are generally priced upon. Investors are betting on the future earnings or profitability of a particular company or industry when they buy a stock. A company's earnings are based upon its sales, costs, and margins. The more a company can control its margins, the more earnings or profit it can squeeze out of its business. If a company can grow its margins and profits over time and offer projections about how it can do that in the future, investors will want to own the stock to capitalize on its future growth.
If you look at Morgan Stanley's chart, you can see that profit growth nearly cut in half in the fourth quarter of 2018, and then disappear in the first quarter of this year, then slowly start to rebound in the second half of 2019.
What's Next These disappearing profits are not a new development by any means. Institutional investors and equity analysts have been forecasting these declines since the middle of 2018. Some would say they have 'priced in these declines', and discounted the stocks they own or analyze. By pricing in those declines and discounting the 'fair value' of the stocks they own, the bad news in the earnings reports won't cause a selloff. Similarly, companies know what investors are expecting from them since they actually provide that 'guidance' in their previous earnings reports and update it throughout the quarter if they determine that it is necessary. They are legally required to do so, although some companies like Tesla have a weird way of doing that. If a company materially misses its own guidance or analysts' expectations, investors will run from the stock like its poison ivy. On the flip side, if a company beats expectations handily, the stock usually gets bid higher.
Pinterest Preps for an IPO Speaking of profits, another company that has yet to make one is going public. Photo-sharing social media app Pinterest is planning its public markets debut in the very near future. The company filed an amended S-1 document with the SEC today, indicating that it intends to price its share in the $15-17 per share range as it sells 83.5 million shares in an attempt to raise up to $1.5 billion. That would value the company at around $12 billion dollars. Here are some key stats:
Pinterest is the "P" among the LUPA stocks - Lyft, Uber, Pinterest and AirBnB. Its photo pinning and posting are popular, especially among women and lifestyle brands, and it makes money through advertising relationships with brands.
Read more: How Pinterest Makes Money
Going public allows the company to raise money to grow its business, acquire other competitors and develop new products.
Another thing it can help a company do? Pay off its original investors and founders. Ben Silbermann is Pinterest's CEO and one of its original founders. Here's a list of that fortunate group, courtesy of CNBC:   Courtesy of LOC Today in Financial History We are introducing this new feature to the newsletter today. Please let us know what you think.
On April 8, 1935, Congress approved the Emergency Relief Appropriation Act of 1935, the work relief bill that funded the Works Progress Administration (WPA). Created by President Franklin Roosevelt to relieve the economic hardship of the Great Depression, this national works program (renamed the Work Projects Administration beginning in 1939) employed more than 8.5 million people on 1.4 million public projects before it was disbanded in 1943. If you drive around the U.S., you'll see many public parks, buildings, roads, bridges, schools, and other public structures that were built by the WPA. As the conversations around Modern Monetary Theory (MMT) get louder, you may hear some comparisons to the WPA. One of the tenets of MMT is that everyone who wants a job should have one, and the government should provide that job if the private sector cannot. (Photo courtesy U.S. Library of Congress)
Read More: What is Modern Monetary Theory
Chart of the Day: Key Market Indicator Remains Strongly Bullish  The U.S. equity markets were mixed on Monday, with the S&P 500 and Nasdaq Composite up slightly, and the Dow and Russell 2000 down modestly. But market sentiment, as measured by the CBOE's put-call ratio, continued to flash strongly bullish signals. While this indicator lags the market and may not be a wholly accurate or complete gauge of sentiment, it can certainly provide an insightful look into the overall mood and level of fear in the markets at any given time.
The put/call ratio is a simple formula comparing the trading volume of put options to call options. Generally, put options are considered an expression of bearishness for options buyers. Conversely, call options are considered an expression of bullishness for options buyers. Of course, this is not always the case, as options can be traded for many other purposes than just speculating on market direction. Options can also be used to generate income, provide insurance, or to hedge underlying positions. But the most basic function of calls and puts is to express sentiment.
To derive a put/call ratio, simply divide the number of traded puts by the number of traded calls. If there are more traded puts than calls (bearish), the ratio will be above 1. And if there are more traded calls than puts (bullish), the ratio will be below 1. The CBOE's put-call ratio provides an overall view of market sentiment for U.S. stocks, ETFs, and indexes.
As shown on the chart, the big spike far above 1 in late December corresponded with the disastrous drop in the markets back then. Since then, though, the spikes have been much smaller as the market has recovered rapidly. Currently (as of the market close on 4/8/2019), the ratio is well below 1 and near the lows of the past 8-9 months. What does this mean? Despite continued market worries about a global economic slowdown and potential recession, investor sentiment appears exceptionally healthy at the moment. While this complacency could change at a moment's notice, the highly bullish sentiment bodes well for a probable full market recovery.
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Monday, April 8, 2019
Margins Matter
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