foxex: Caution

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Monday's Headlines

1. Markets Remain Moderately Bullish

2. 'Tis the Season for Earnings

3. Optimistic Overestimations

4. China Shows Signs of Slowing Down

5. Prime Time(s Two)

Markets Closed

Dow
27,359.16 +0.10%

S&P
3,014.30 +0.02%

Nasdaq
8,258.19 +0.17%

VIX
12.72 +2.66%

Bitcoin
$10,895.15 +3.16%

US 10-Yr Yield
2.092 -0.66%

Markets Today

U.S. stock indexes closed slightly up and in record high territory on Monday after positive showings in both Asia and Europe. Despite China having just reported its slowest quarterly GDP growth in 27 years, markets mostly shrugged off the data and remained moderately bullish.

Intraday price action, though, showed markets dipping into the red, which most likely points to some concern and caution among investors ahead of a critical earnings season.

Citigroup was the first of the big banks to report on Monday morning, when it beat on both the top and bottom lines. Up next are other banking heavyweights set to report earnings this week, including Goldman Sachs (GS), Wells Fargo (WFC), Bank of America (BAC), and J.P. Morgan Chase (JPM). How these banks performed in the second quarter will likely set the tone for the markets in the near-term.

Earnings Season Kicks Off

Financials leads the parade
Will low interest rates help or hurt their prospects?
Earnings estimates across sectors may still be unrealistic

Second quarter earnings season is upon us and Citigroup kicked things off this morning. The bank beat profit forecasts due to the windfall it received through the IPO of Tradeweb back in April which fetched $1.2 billion. Tradeweb is an electronic exchange and markets data source, which is owned by 12 Wall Street banks to compete with Bloomberg and Reuters. Apart from that $350 million pre-tax gain, Citigroup's revenue in trading and investment banking fell during the quarter.

The key for Citi and other banks going forward will be their ability to navigate a lower interest rate environment by borrowing low in the short term, and lending out at higher rates in the long term. If they can do that well, it improves their net interest margin, one of the key metrics that influence bank profitability.

Read more: What is Net Interest Margin?

Are Estimates too High?

Beyond banks, one of the key concerns this earnings season is whether earnings estimates are too high. We know that companies have been downplaying their forecasts due to economic weakness, the fading of the 2017 tax cuts, and the trade war, but investors may be assuming a profit recovery is coming sooner than might be realistic. That's why earnings guidance is paramount this season. What are company executives saying about their businesses and the economy looking out to the rest of 2019 and beyond?

Morgan Stanley's equity research team says they are too optimistic.

China's Growth Slows

2Q'19 slows from 6.4% to 6.2% q/q
Weakest growth rate in 27 years
Economy faces "complex environment at home and abroad"

At 6.2% growth for the second quarter, it's hard to call China's economy "slow," but it is slowing. According to China's National Bureau of Statistics, GDP slowed from the first to second quarters and its current pace of growth is the slowest since 1992.

The ongoing trade war and a slowing global economy are two of the key culprits, but China's domestic economy may be cooling after decades of intense growth spurred by low interest rates and infrastructure spending. Its trading partners, besides the U.S., are also facing economic headwinds, as exports fell 1.3% in June and imports sank 7.3% year over year.

You wouldn't know it by reading the release on today's economic report, however.

Here's the opening sentence:

"In the first half of 2019, faced with complex environment both at home and abroad, under the strong leadership of the Central Committee of the Communist Party of China with comrade Xi Jinping as the core, all regions and departments strictly implemented the decisions and arrangements made by the CPC Central Committee and the State Council, insisted on the general working guideline of making progress while maintaining stability, stuck to the new development philosophy, advanced the high-quality development, focused on the supply-side structural reform, deepened the reform and opening up, strengthened efforts on maintaining stability in areas like employment, financial sector, foreign trade, foreign investment, domestic investment, and market expectation. As a result, the national economy performed within the reasonable range, and sustained the momentum of progress in overall stability."

Make no mistake, China is committed to growing and strengthening its economy by whatever fiscal and monetary means necessary, and unlike other countries, its central bank is not independent. Its rate of infrastructure spending and fixed asset investment has slowed in the past year, but China's leaders can turn that hose back on anytime it wants to.

Amazon's Two Day Prime Day

Online giant extends Prime day to two
Members only pricing creates "exclusivity" demand
Teaming up with Taylor Swift and Lady Gaga

Why limit one of your best sales days of the year to just one day? Amazon kicked off day one of Prime Day today with hefty discounts across most of its retail categories for its Amazon Prime members only. CEO Jeff Bezos revealed earlier this year that there are 100 million Prime members globally who pay around $10 per month for the privilege. It's cheaper for students and pricing depends on the country, but that's a very nice little subscription business to augment the rest of Amazon's arsenal.

Amazon doesn't break out sales figures for Prime Day, but industry estimates forecast revenue north of $6 billion for just the first day.

This year is also Amazon's kickoff for one day delivery, which it is offering on 10 million products in its inventory.

Not to be undone, the company is flexing its entertainment muscles this year as well, by producing a kick-off concert (for Prime members only) with Taylor Swift and others last Wednesday and launching a beauty line with Lady GaGa.

Amazon accounts for about 40% of all e-commerce sales, according to estimates, but its household penetration in the U.S. keeps climbing to now 63%. If we've learned anything from watching Jeff Bezos for the past 25 years, he won't stop until it's 100%. We'll see if two days of Prime Day can boost those numbers.

chart courtesy Cowen Research

More News:

What To Expect From Apple Earnings

Nektar Therapeutics Stock Poised for Significant Move

How Amazon $5 Billion In Prime Day Sales Could Fire Up Sales Growth

chart courtesy www.koyfin.com

Shares of CF Industries, the agricultural fertilizer distributor, rose by almost 4% today. Wynn Resorts' stock increased by nearly 3%, following J.P. Morgan announcing the growth potential in its Boston, LA, and Macau locations.

Symantec's stock fell by almost 11% after negotiations broke down for Broadcom's acquisition of the cybersecurity company. The stocks of two energy companies, Cimarex and Noble, both fell by over 4%.

Word of the Day

Guidance

Guidance refers to statistical information that companies disseminate to shareholders in an effort to indicate projected future performance. Guidance, alternatively referred to as "earnings guidance" or "forward-looking statements," typically includes revenue estimates, projected earnings, and capital spending estimates.

How Guidance Works
Although companies are not legally required to provide earnings guidance, it is nevertheless common practice for many of them to do so. Earnings guidance is generally provided along with a company's quarterly earnings reports and is often discussed during analyst meetings.

photo courtesy Boeing (William Boeing on the left)

Today in History

July 15, 1916

William Boeing, a Yale-educated aeronautical engineer, incorporates the Pacific Aero Products Co. in Seattle with $100,000 in capital; he keeps 998 of the original 1,000 shares of stock for himself. In 1917 he renames his firm the Boeing Airplane Co. Boeing later makes jet travel an accepted part of everyday life.

http://www.boeing.com/history/boeing/building.html