foxex: Spinning Records

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Monday's Headlines

1. S&P500 and Nasdaq Hit Intraday Record to Kick off Busy Week

2. Alphabet Misses its Revenue Number

3. Fresh IPOs Coming to Market

Markets Closed

Dow
26,554.39 +0.04%

S&P
2,943.03 +0.11%

Nasdaq
8,161.85 +0.19%

VIX
13.06 +2.59%

INV Anxiety Index
98.73 Low

US 10-Yr Yield
2.536 +1.24%

The S&P500 and Nasdaq Spin up New Records

A very busy week got started on a high note as both the S&P500 and the Nasdaq notched new intraday records, extending their gains from last week.

Around 150 companies are scheduled to report earnings this week, including heavyweights Apple, McDonald's and Eli Lilly, to name a few. More than half of the S&P500 has reported results, to date, and we've learned a few things from their report cards, per Bank of America's research team:

68% of companies have beaten profit expectations so far
52% of companies have beaten on sales
43% haven beaten on both metrics

The punishment for missing expectations is pretty severe, though. Companies that miss their earnings and sales expectations, are getting sold off by about 5.6%, on average. Companies that beat earnings and sales expectations are being bid up by about 1.3%. And you wonder why so many CEOs would love to get away from the quarterly reporting cycle...

Here is Bank of America's breakdown:

Alphabet is Exhibit A

Speaking of hits and misses, Alphabet, the parent company of Google, handily beat earnings forecasts, but missed revenue forecasts. The company reported results just after the market close today, and already the stock is down 5% in after-hours trading.

Here is the breakdown:

EPS: $11.90 per share, ex-items, vs. $10.61 expected (Reuters)
Revenue: $36.34 billion, vs. $37.33 billion expected( Reuters)
Traffic acquisition costs: $6.86 billion, vs. $7.26 billion expected (FactSet)

Shares of Alphabet are up 28% so far in 2019 and it is still a dominant player in search, media, advertising, software (Android), and now cloud services. Its venture arm, Google Ventures, owns a 5% stake in Uber and Lyft, which will result a nice payout for that division.

Still, Alphabet earns most of its revenue through Google, which includes Google.com, YouTube and Android. A lot of that revenue comes from what we call a CPC model (Cost per Click). Every time you click on a sponsored link on a search results page on Google.com, a little cash register rings in Mountain View California.

That register has been ringing less and less over the past couple of quarters, so Alphabet has been moving into several other businesses through what it calls 'Other Bets'. Other Bets include Waymo, Nest, Calico and Google Ventures. These are companies in development that Google has bought or incubated. They don't make a lot of money now, but Alphabet believes they have potential.

Here's the business structure for your reference (Zoom on in):

Optimism is Fading

With two out of three major U.S. markets at record highs following a blistering start to the year, it shouldn't come as a surprise that investor optimism is starting to fade. It's that peculiar reverse psychology that investors play when things seem too good to be true. We look for reasons why they won't stay that way, and the more you look, the more you will find.

As Warren Buffett famously says, "Be greedy when others are fearful and fearful when others are greedy."

Today's reason du jour is concerns around P/E expansion. That's Price to Earnings expansion, which is a measure of how much more it will cost investors to pay for every increased dollar of earnings for a particular company or an index.

As stocks get more expensive, or a market index like the S&P500 eclipses a record, its Price to Earnings multiple expands. The price has gotten higher, while the earnings have not . That's why people say the market has gotten 'expensive'.

It has.

If earnings, aka corporate profits, can't keep it next quarter and for the rest of the year, this rally could end in fire.

Here's Morgan Stanley's chart on P/E Expansion.

IPOs to Watch For

Tis' the season to go public, and a few more companies are lining up to do just that.

The We Company, known to most of us as WeWork, confidentially filed an S-1 registration statement with the SEC to file for a public offering. I don't understand why the company issued this press release if it was trying to keep it quiet, but, O.K. WeWork did not issue a public S-1 document, so we can't tell you its financials. CNBC reported that the company shared a presentation indicating that it lost $1.9 billion in 2018 on revenue of $1.8 billion.

Beyond Meat, which makes what it calls 'the future of protein', via plant based burgers, sausages and 'crumbles', is also expected to go public this week, selling 8.75 million shares in an attempt to raise $1.2 billion. It also lost money last year.

It's a shared workplace and a veggie burger kind of IPO week, I guess. Welcome to 2019.

More News:

Target Stock Recovers Some Ground After Massive Barclays Upgrade

McDonald's Reports Earnings After Testing Its Price Target

The Trade Desk Shares Signal Unusual Buy Activity

Charts courtesy of www.koyfin.com

Ingersoll-Rand makes industrial equipment and heavy machinery. It entered into a deal with Gardner Denver Holdings to create a spin-off business that would generate $15 billion in annual profits.

C.H. Robinson is a trucking and freight logistics firm. Today, there were reports that Amazon.com is moving aggressively into the trucking business. Even a hint of Amazon's presence in a new sector is enough to knock some points off your board.

Word of the Day

PCE: Personal Consumption Expenditures

Why today: Because the PCE Index in the U.S. is barely budging and it is one of the key inflation indicators the Federal Reserve looks at when assessing interest rates.

Personal consumption expenditures (PCE), or the PCE Index, measures price changes in consumer goods and services. Expenditures included in the index are actual U.S. household expenditures. Data that pertains to services, durables and non-durables are measured by the index. Similar to the consumer price index (CPI), the PCE is part of the personal income report issued by the Bureau of Economic Analysis of the Department of Commerce.

Today in History

photo courtesy hearstfoundation.org

On April 29th 1863, William Randolph Hearst, one of the founders of the American media industry, is born to George Hearst, a wealthy miner and rancher, and Phoebe Apperson Hearst, a schoolteacher. In 1887, young Hearst, just out of Harvard, takes over as editor of a fledgling newspaper called the San Francisco Examiner, which his father had recently acquired as settlement for a gambling debt. By the turn of the century, William Randolph Hearst is one of the worlds most powerful press barons -- and the model for Orson Welles Citizen Kane. Hearst was also a member of U.S. Congress and ran unsuccessfully for Governor of New York and for the Democratic Presidential nomination in 1904. He did leave quite a mark on journalism and publishing, however.

"Rosebud".

Source: http://bioguide.congress.gov/scripts/biodisplay.pl?index=H000429

Chart of the Day: Health Care Sector Rebounds but Continues to Lag Market

The S&P 500 and Nasdaq Composite are both in record high territory once again, and the Dow Jones Industrial Average is not far off its own all-time highs. Tech stocks have been surging, as have financial stocks ahead of the critical Fed meeting this week. Even the battered healthcare sector has been on the rebound, bouncing sharply in the past week after having plummeted for much of the first half of April.

Despite the recent sharp rebound, however, the health care sector continues to underperform severely, year to date. Since the beginning of 2019, XLV is up only around 4.3% (as of the market close on Monday, 4/29/2019). Compare that measly number to the benchmark S&P 500's +18%.

Helping to drive the sector's most recent tumble in mid-April have been concerns that Democratic Party challengers in the upcoming 2020 U.S. presidential elections are gaining support for their healthcare plans. Most notable of these challengers is Bernie Sanders, who has continued to push for a complete overhaul of the U.S. health insurance system, including a government-run "Medicare-for-All" plan that appears to be gaining momentum. This and other proposals are prompting worries about the possible impact on health insurers and the healthcare sector as a whole.

While the current partial rebound in XLV may be heartening, any overall market downturn or increased calls for far-reaching healthcare reform will likely weigh heavily on the sector. In that event, XLV is likely to fall back towards its April lows. And any further break below could push the ETF back down towards its late December lows.