 The Market Sum | Insight after the bell
By Caleb Silver, Editor in Chief Thursday's Headlines 1. Markets Recover in Final Hour 2. Mixed Economic Signals add to Fed Conundrum 3. Guidance is Everything 4. Microsoft's Moment 5. Automakers in the Slow Lane Markets Closed
 Markets Today
U.S. markets reversed out of steep losses earlier in the day to end slightly higher. This happened as earnings season picks up speed and investors digest the results and the future guidance from public companies caught in an unusual economic dynamic.
Earnings for the second quarter were forecast to fall 6.5% from the first quarter on average, across S&P 500 companies. We knew that going in and investors seemed to be fine with it, given that the markets all hit new records recently.
We know part of that was due to the hopes that the Fed will cut interest rates at its next meeting and will "act as appropriate" to keep the economic expansion going.
We also know that anytime there is better than expected economic news in the U.S., like the last jobs report, investors assume that will reduce the chances that the Fed will feel the need to cut rates. It's the monetary policy tango we engage in when economic cycles get weary.
Regional Manufacturing Report Shows Strength There was some good economic news this morning, albeit from a small, but important region of the U.S.
The Philadelphia Fed Manufacturing Survey, which surveys companies in and around Northeastern Pennsylvania and New Jersey about manufacturing activity, sales, orders, inventories, and related matters, showed a surprise increase in July. It also showed that these businesses feel pretty confident about the next 6-9 months. That flies in the face of a lot of the other manufacturing reports we have seen lately, and it's only one month, but the increase was notable.  To be sure, the Fed looks at a lot of economic data and surveys as it evaluates changes in monetary policy, and one regional report like the Philly Fed survey from today is unlikely to sway it one way or the other. But, if we start to see a broader trend forming, the odds of a rate cut in late July may start to slim.
On the Other Hand... The Fed may choose not to wait for the economy to deteriorate further, and act swiftly and strongly by cutting interest rates more than most traders expect. New York Fed President John Williams said as much in a speech earlier today. Williams said "(with) only so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress."
It may be a coincidence, but U.S. markets headed higher as soon as those comments hit the wires.
It's all about Guidance Earnings weakness for S&P 500 companies in the second quarter has been well telegraphed by most companies and the analysts who follow them. As we have noted, earnings for S&P 500 companies for the last quarter are expected to decline 6.5% from a year ago. Companies are pretty good about managing their balance sheets to deliver "upside surprises" to investors and beat expectations. That's another little tango that happens in the world of publicly traded companies. But, even when companies miss forecasts or fail to top them, what they say about the future is arguably more important.
Read more: How 2nd Quarter Guidance Could Hammer Markets
Remember: Stocks are typically priced on their future earnings or forward price to earnings ratio.  The companies that guide higher with their future forecasts are the ones that investors are rewarding the most right now. Guide lower, like railroad company CSX did yesterday, and investors will turn on you like bad milk. Guide higher, like tobacco company Philip Morris did today, and you get an 8% gain like PM saw today.  Here's a short list of companies that are guiding higher, and those that are not:
Higher:
Lower:
Microsoft's Moment Speaking of positive guidance, Microsoft is on an absolute tear. The company grew revenue by 12% and operating income by 20% in the quarter (year/year).
Microsoft shares have gained 34% this year, pushing the company past a $1 trillion in market cap.
Most people who don't follow companies as closely as we do may still think of Microsoft as a software company. While it is still a giant in that market with its ubiquitous Windows operating system, its cloud computing business—called Azure—is where its profit margins and future growth lives.
CEO Satya Nadella has steered the company towards the cloud since he took over Microsoft in 2014. In the last quarter, Microsoft generated more than $11 billion in what it calls its Intelligent Cloud business segment, a 64% increase from a year ago. It's now a third of Microsoft's overall revenue.
In the cloud computing business, which is where most of our digital data lives, Microsoft is in a fierce battle for market share with Google (GCP), Amazon Web Services (AWS), IBM, Alibaba, and several other players. chart courtesy CBInsights  Automakers in the Slow Lane
In yet another sign of the global economic slowdown, global production of trucks and cars continues to slow. According to analysis from IHS Markit, the only market that showed growth in the second quarter was North America, and only for truck production. Global production is set to decline 7.5% from a year ago.
In the past couple of years, North American automobile companies like Ford and GM have effectively pulled the plug on investing in the production of sedans in favor of SUVs, crossovers, and trucks. Ford will still make the Mustang and GM will still make the Chevy Malibu and a few select sedans, but they are favoring trucks and SUVs because they generate better profit margins and consumers want them.
But this global production slowdown speaks to the broader economic slowdown we are seeing in Asia, Western Europe, and the U.S. Increased tariffs on raw materials, a strong dollar, and an uncertain geopolitical environment aren't helping, which will likely prompt automakers, auto suppliers, and retailers to cut their forecasts for the remainder of the year, according to Bank of America.
Ford reports earnings on July 24 and GM on August 1st. Their outlooks will move the entire automobile ecosystem.  Pardon the Correction... But another one of our smart readers pointed out in yesterday's note that I said Japan had slowed its purchase of U.S. Treasury bonds in the past month, but the chart I shared showed an uptick in those purchases. Our reader was right—Japan did increase its purchases of U.S. Treasuries last month, but that followed two consecutive months of decreasing its holdings. It's an important distinction, given that Japan is the second largest foreign holder of U.S. Treasuries, and we appreciate the correction. Here's the Treasury Dept.'s raw data if you are interested.
chart courtesy www.koyfin.com  Shares of Philip Morris International, the cigarette and tobacco manufacturing company, rose by a little over 8% today after the results of their Q2 earnings beat analysis estimates. Contrary to other railroad stocks in these past few days, shares of Union Pacific increased by over 6% following the release of their Q2 earnings, which were strengthened by several cost-cutting measures.  Netflix's stock decreased by a whopping 10% after the company reported yesterday that it lost a significant number of subscribers during the most recent quarter. Though United Rentals beat its Q2 earnings estimate, shares for the equipment rental company still fell by almost 8% today after it lowered its revenue outlook for the year.  Word of the Day ReversalHow could we not...?
A reversal is a change in the price direction of an asset. A reversal can occur to the upside or downside. Following an uptrend, a reversal would be to the downside. Following a downtrend, a reversal would be to the upside. Reversals are based on overall price direction and are not typically based on one or two periods/bars on a chart. Certain indicators, such a moving average or trendlines, may help in isolating trends as well as spotting reversals.  photo: Gordon Moore and Robert Noyce, from Wikimedia Commons Today in History July 18, 1968: Robert Noyce and Gordon Moore, engineering refugees from Fairchild Semiconductor, establish N.M. Electronics Corp. to miniaturize electronic circuitry onto silicon chips. The firm, based in a small leased building in Mountain View, Calif., generates $2,672 in revenues its first year. It soon changes its name to Intel Corp.
Source: Robert N. Noyce, 1927-1990, privately printed memorial pamphlet, Sematech, Inc., Austin, Tex., 1990, p. 16; http://www.intel.com/intel/anniversary/
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Thursday, July 18, 2019
Reversal
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