 The Market Sum | Insight after the bell
By Caleb Silver, Editor in Chief Wednesday's Headlines 1. Markets Trade Lower as Earnings Roll In 2. Netflix Misses 3. Rail Stocks Jammed Up 4. China Buys Less U.S. Treasuries and Homes 5. Happy Birthday to the Greenback Markets Closed
 Markets Today
U.S. markets experienced a bit of a sell-off today as more corporate earnings reports were released to investors. We heard from more banks today, like Bank of America and several regional banks, who all told a similar tale: Retail banking (their consumer business) is strong, but businesses are reticent due to economic uncertainties and a low interest rate environment could pinch their margins.
That net interest income we wrote about yesterday is becoming a broader theme as evidenced by Bank of America's report today. While the Bank was able to increase NII in the last quarter year over year, that metric has declined for two straight quarters and could head lower if the Fed cuts interest rates at its next meeting in a few weeks.
Read more: What is Net Interest Income?
Here's the Bank's own chart from its earnings release:  It's far from a crisis—just something to keep an eye on as the next Fed meeting approaches July 31st.
Netflix Disappoints on Subscriber Growth
Netflix had a lot to prove last quarter given concerns about its ability to grow subscribers at a healthy rate, despite the fact that it is losing two popular shows and the Disney content library. Safe to say, it did not deliver on expectations. The streaming giant only added 2.7 million global subscribers against forecasts of nearly double that. Of those, 352,000 came from the U.S., where Netflix has a healthy market saturation. When you get to be as big as Netflix, growth is hard against past results. It is experimenting with different display formats for countries like India and trying different pricing structures in various countries, but it's just not as easy as it used to be.
Here's the company's subscriber growth rate against its own projections:  New Competitors Netflix is certainly not the only streamer on the block and competition is getting more intense. Disney will role out Disney+ later this year at a cheaper price point than Netflix, and its taking its library that includes everything from Mickey Mouse to Mr. Fantastic with it. But Apple, WarnerMedia, NBCU, and others are joining Hulu, Amazon, BBC, Hotstar, YouTube, and many more in offering streaming entertainment as well, which means more choices for consumers.
Netflix, which is burning through $3.5 billion in free cash flow in 2019 alone, can usually raise a a few hundred million dollars or more just by increasing its monthly subscription fee. It might not be so easy as new competitors flood the market. This has led many to wonder if Netflix will allow advertising on the platform. CEO Reed Hastings shut down that idea in today's shareholder letter:
"We, like HBO, are advertising free. That remains a deep part of our brand proposition; when you read speculation that we are moving into selling advertising, be confident that this is false. We believe we will have a more valuable business in the long term by staying out of competing for ad revenue and instead entirely focusing on competing for viewer satisfaction."
That doesn't mean Netflix doesn't work with advertisers. It has interesting integrations with brands like Coke, Nike, and Burger King for popular shows like "Stranger Things." Never say never...stranger things have happened.
image courtesy Burger King  Off the Rails
Regular readers know I'm partial to cargo and shipping stories, and this one is important. CSX, the U.S. based railroad operator that covers the East Coast reported earnings and revenue that missed analysts expectations.
CEO James Foote, who has been in the business for over 40 years had this to say on the company's conference call this morning:
"Both global and U.S. economic conditions have been unusual this year, to say the least, and have impacted our volumes. You see it every week in our reported carloads... The present economic backdrop is one of the most puzzling I have experienced in my career."
The company said it expects revenue to decline 1-2% this year—more than the 1% originally forecast. While that's far from extreme, transportation companies are the canaries in the coal mine for the economy. They are as much supply chain managers as they are shipping companies. They have to be able to forecast demand with very little room for error given their high cost structures. To be fair, CSX lost business from a Pennsylvania gas refinery this year due to an explosion that took it offline, but the negative sentiment coming from the CEO was enough to derail several other railroad companies today. Here's the daily chart for CSX, Norfolk Southern and Union Pacific, all hitting a rough patch:  China Holding Less U.S. Treasuries
This could be related to the U.S. China trade war or just a sign of China's waning appetite for U.S. Treasuries given the price appreciation this year. But, for the second month, its holdings of U.S. Treasuries declined.
According to the U.S. Treasury Dept., Chinese holdings of U.S. government debt declined to $1.113 trillion in April, from $1.120 trillion the previous month. Still, China, the world's second-largest economy remains the largest non-U.S. holder of Treasuries.
Japan, also a large holder of U.S. debt, also lightened its holdings last month. Long term U.S. Treasuries have traditionally been considered a safe and reliable investment, which is why they are so widely held.
Read more: Why China Buys U.S. Debt
Refinitiv's smart chart puts the declines into perspective:  Incidentally, the Chinese have also been buying less U.S. real estate. It's conjecture to say this is trade war related, but it is an interesting coincidence. The dollar has also been very strong, which can deter foreign buyers.
According to the National Association of Realtors, foreign buyers purchased $77.9 billion worth of U.S. existing homes from the 2019 survey reference period, a 36% decline from the level reached in the previous 12 months ($121 billion). Non-resident foreign buyers accounted for $33.2 billion of U.S. existing-home sales, a 37% decline from the prior level of $53 billion.
For the seventh consecutive year, China exceeded all other countries in terms of dollar volume of purchases, buying an estimated $13.4 billion worth of residential property, but it was still a 56% decline from the previous 12 months.
chart courtesy www.koyfin.com  Shares of Cintas, the business service company, increased by almost 9% today after boosting profit forecasts for 2020, its confidence stemming from beating earnings estimates yesterday. In that same vein, Abbot Laboratories's stock rose by over 3% after its earnings—augmented by increased sales of medical devices—beat Wall Street's estimates.  The rail transportation company CSX's stock plummeted by over 10% after its 2Q earnings fell short of expectations, fueling fears that the ongoing trade war is harming corporate earnings. Shares of Textron, the aircraft manufacturer, decreased by more than 9% today after announcing similar results for its 2Q earnings.  Word of the Day Free Cash FlowGiven Netflix's ability to burn through $3.5 billion in cash flow this year, we thought this term appropriate—especially during earnings season.
What is Free Cash Flow?  photo courtesy Treasury.gov Today in History July 17, 1861 The first paper money payable on demand, whose color gives our bills the nickname greenbacks, is issued by the U.S. government. https://home.treasury.gov/
How can we improve the Market Sum? Tell us at marketsum@investopedia.com
Enjoy the Market Sum? Share it with a friend. Or share the link below to invite friends to sign up.
CONNECT WITH INVESTOPEDIA
Email sent to: mondemand.forex@blogger.com To update your newsletter preferences or unsubscribe, click here.
114 West 41st St, floor 8 New York NY 10036 © 2019, Investopedia, LLC. All Rights Reserved | Privacy Policy |
Wednesday, July 17, 2019
Derailed
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment