foxex: Spent

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. Markets Dip as U.S. Retail Sales Slow

2. Earnings Continue to Surprise

3. GM and UAW Reach Tentative Pact to End Strike

4. Where are all the MBA Candidates?

Markets Closed

Dow
27,001.98 -0.08%

S&P
2,989.69 -0.20%

Nasdaq
8,124.18 -0.30%

VIX
13.68 +1.03%

Bitcoin
$8,013.26 -2.29%

US 10-Yr Yield
1.75 -1.30%

Image: Getty Images

Markets Today

Markets pause as U.S. retail sales slow
Bank of America and Netflix rise on earnings

Euphoria doesn't last long in this market. Yesterday's 1% gains gave way to caution as investors tried to find hints of optimism in third quarter earnings reports and economic data.

They didn't find it in the latter today as U.S. retail sales fell 0.3% in September, the first monthly drop since February, according to the Commerce Dept. Retail sales measures purchases made by consumers at stores, restaurants and online - basically where we shop. Auto sales and gasoline are included, and both fell in September, dragging down the overall number.

source: U.S. Commerce Dept.

As we often say, consumer spending is about 70% of U.S. GDP. It has been one of the only strong areas of the U.S. economy for the last year given low unemployment, relatively low gas prices, and falling interest rates. When consumers start to pull back, businesses tighten their own spending because they don't want to be caught with excess supply or a bloated workforce.

September's drop was only one month of data, and it is counter to the trend we have seen all year. It is also counter to the trends we are seeing in Personal Consumption Expenditures (PCE), which have been steadily rising all year. Again, you can thank low interest rates and cheap gas for that, in addition to low inflation.

Retail sales are lumpy, in that you need a few months in a row to establish a trend. The trend shifted slightly in September which may be partially due to the heated rhetoric in the trade war and a rough stock market. Those can add a psychological overhang on consumer spending as evidenced by my barber, who asked me if we were already in a recession. No Sam, we are not... and take a little extra off the top, please.

Earnings

Bank of America, the largest retail bank in the U.S., does have a lot of exposure to consumers. It's the nation's largest lender as well, which makes it vulnerable to low interest rates for some loans. Still, the Bank managed to beat earnings forecasts, and its net interest income accounted for more than half of its quarterly revenue, or $12.3 billion. It benefits from the double-edged sword of low rates, but a lot of volume, as consumers and businesses take advantage of cheap borrowing costs.

Shares of BAC have traded in line with the broader market over the past year, and have slightly outperformed the financial sector, as seen through the ETF, XLF.

Charts courtesy of YCHARTS

Netflix Surprises

A bit of good and bad news for Netlfix. The streaming media giant beat analyst expectations in its latest earnings report for profit and missed slightly on the revenue line. But subscriber growth is what counts, and that was a mixed bag.

U.S. subscriber adds came in at 517,000 against expectations of 802,000
International subscriber adds came in at 6.26 million vs. estimates of 6.05 million

The company had forecast total adds of 7 million, so this was a slight miss. It also said that subscriber additions slowed and cancellations rose after it raised prices last quarter. That's not a good sign.

Still, the fact that Netflix was able to grow net income more than $260 million from the prior quarter has investors piling back in. Shares are up 10% after-hours. We'll see if they still like the movie tomorrow.

Shares of Netflix are down 20% in the past three months, and it's the 6th most shorted stock in the S&P 500 according to S-3 Partners, which tracks such data. Its short interest - or the total amount of dollars betting it will continue to fall, is $6.2 billion or 5.10% of its float. In other words, traders have placed a large bet that Netflix shares will continue to fall.

That bet is largely predicated on the fact that Netflix's subscriber growth is slowing, its debt servicing costs are rising, and its dominance in streaming programming is under severe attack by Apple, Amazon, and Disney. Netflix actually lost U.S. subscribers for the first time in the second quarter. Apple and Disney have recently launched their own subscription based streaming services at lower price points than Netflix, which keeps raising its prices to buy more programming and service its debt. It has to keep buying/licensing programming to keep its loyal users as Disney takes some of its own content off of Netflix. Netflix spent $6.3 billion through the first six months of 2019 and might end up spending $15 billion this year.

Here's Netflix (in purple) against Apple, Amazon, and Disney. To be sure, those other companies have enormous businesses outside of streaming media, whereas Netflix is kind of a one-trick pony.

Charts courtesy of YCHARTS

GM and the UAW Near Settlement

After almost a month, the United Auto Workers and General Motors have reached a tentative agreement to end the strike that effectively shut down 30 auto plants and factories. GM's 46,000 union employees will continue to strike until a deal is actually in place, which could come as early as tomorrow.

The two sides earlier had agreed to pay increases during the new contract's four years, a path to full-time employment for temporary workers and no changes in the amount workers contribute toward their health-care benefits. The UAW also wanted a program in place to increase wages for new union employees, and for GM to invest up to $9 billion in updating its plants with better equipment. No word on if those matters have been addressed, yet.

The strike has cost GM an estimated $1.5 billion dollars, and the work stoppage has impacted other businesses and industries tied to the automaker's production processes.

U.S. MBA Applications Fall for 5th Straight Year

The golden ticket of an MBA from a U.S. business school has lost its luster, apparently.

International applications to U.S. full-time two-year Master of Business Administration (MBA) programs fell 17.1% this year, a steep decline that contributed to the total 10.8% drop in applications during the same period. Overall, graduate business schools in the U.S. received 9.1% fewer applications in 2019, with prestigious, top-ranked universities seeing the biggest dips.

The numbers from the latest Graduate Management Admission Council (GMAC) report show applications to American MBA programs have been falling for five years in a row, while Europe and Canada are seeing growing application volumes driven by international candidates.

Survey results indicate the global appeal of U.S. business schools has been diminishing due to a shortage of H-1B temporary worker visas and growing anti-immigration rhetoric in the country. The downward shift in preference for the U.S. among candidates began in 2009, says the report, and sharply intensified in the last few years as the Trump administration increased its scrutiny of visa applicants.

More News:

Snap Earnings: What to Look For

3 Charts That Suggest the Consumer Services Sector Is Headed Higher

Apple Shares Are Seeing Huge Demand

(chart courtesy YCHARTS)

Pharmaceutical companies McKesson, AmerisourceBergen, and Cardinal Health rose 4.6%, 3.4%, and 2.4% today, continuing from yesterday's rise spurred by news of a settlement with state and local governments over the opioid epidemic.

Alexion Pharmaceuticals' stock fell 5.3% today on news that they would acquire Achillion Pharmaceuticals. IT firm IBM fell 3.8% today on a revenue miss. Fellow IT firms DXC Technology and Autodesk also fell 3.6% and 3.1% respectively.

Word of the Day

Short Interest

Short interest is the number of shares that have been sold short but have not yet been covered or closed out. Short interest, which can be expressed as a number or percentage, is an indicator of market sentiment. Extremely high short interest shows investors are very pessimistic, potentially over-pessimistic. When investors are overly-pessimistic it can lead to very sharp price rises at times. Large changes in the short interest also flash warning signs, as it shows investors may be turning more bearish or bullish on a stock.

Image: https://d23.com/disney-history/

Today in History

October 16, 1923

Today in 1923, Walt Disney and his brother Roy Disney founded the Disney Brothers Cartoon Studio. Disney introduced his most famous creation, Mickey Mouse, in the 1929 cartoon "Steamboat Willie." He created the first animated feature film in 1937, Snow White and the Seven Dwarves, and in 1955 opened the theme park, Disneyland. Disney is now one of the top 20 largest companies in the S&P 500 with a market cap of over 200 billion dollars.

Source: https://d23.com/disney-history/