foxex: Dancing Dow

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Monday's Headlines

1. Markets Rally to New Records on Trade Optimism

2. Saudi Arabia's Aramco Plans Domestic Listing

3. U.S. Sales Growth is Slowing

4. CEOs Behaving Badly

Markets Closed

Dow
27,462.11 +0.42%

S&P
3,078.27 +0.37%

Nasdaq
8,433.20 +0.56%

VIX
12.83 +4.31%

Bitcoin
$9,462.89 2.69%

US 10-Yr Yield
1.79 +3.36%

Image: Getty Images

Markets Today

Global markets rallied to start off the week as trade optimism continues to drive investor sentiment. The DJIA topped a new record as industrial stocks traded higher on trade news. Semiconductors also rallied hard as the U.S. Commerce Secretary hinted that trade restrictions with Huawei, China's largest telecom provider, may be lifted soon.

Here are some of today's biggest headlines:

Headlines

The Dow Jones Industrial Average posted a record high on positive trade news, although no time or place has been set for the official signing of Phase One of the trade agreement between the U.S. and China.
Saudi Arabia has announced plans to take Saudi Aramco, the Kingdom owned oil company, public. The public debut will be in December, although the size of the listing and the exact timing are still to be determined.
McDonald's CEO Steve Easterbrook was fired for violating company policy by having a relationship with an employee. He is being replaced by Chris Kempczinski, McDonald's head of U.S. business. Shares of MCD fell over 2% on the news.
Under Armour has disclosed that it has been under investigation by the SEC and the U.S. Dept. of Justice for accounting irregularities for over two years. Shares tumbled over 18% on the news.
Uber Technologies announced Q3 2019, and the company had smaller losses and higher revenue than expected. This failed to please investors as its losses, while better than the enormous quarterly loss in the 2nd quarter, were still substantial. The stock dropped more than 5% in after hours trading. For more click here.

Saudi Arabia's IPO Plan for Aramco

The Kingdom of Saudi Arabia finally announced plans on Sunday to take Saudi Aramco public via a domestic listing sometime in December. In a press release, the Kingdom said it will list its shares on the Main Market of Tadawul, inside Saudi Arabia. The company has yet to provide details on the listing, such as how many shares it will offer, and at what price. Access to more information on Aramco's website was blocked (for U.S. visitors), but according to various press reports, there isn't much to see beyond the announcement of the IPO.

Reuters reported that Aramco could offer 1%-2% of its shares, raising as much as $40 billion. A deal over $25 billion would top the record-breaking IPO of Chinese e-commerce giant Alibaba in 2014. It could also value Aramco somewhere between $1-2 trillion.

Aramco did provide a summary of its financials for the nine months ended September 30th, in case you are interested to see just how much money it makes.

Spoiler alert, it pulled in $244 billion in revenue, and $68 billion in net income for three quarters of one year. That's an 18% decline from the same period a year ago, which makes sense, given that the price of oil is down about 20% for the year. Oil prices may be depressed for the foreseeable future, which is probably why the Kingdom is anxious to finally list its crown jewel.

Here's a snapshot of Aramco's most recent financials.

Earnings Observations: Sales are Slowing

We mentioned on Friday that profit growth for U.S. companies is slowing based on their earnings reports to date. Now, with over 80% of companies reporting results, it's also very clear that sales are sliding as well, and they're sliding more dramatically than profits. Companies can legally adjust their financials to a degree in order to boost or decrease profitability, but revenue is hard to disguise.

As Jay-Z, the rap artist, producer, and entrepreneur, likes to say, "Men lie, women lie, numbers don't."

This chart from Bank of America's research team shows the stark decline in sales for S&P 500 companies, based on their recent results.

CEO's Behaving Badly

There is a term in the insurance world called "key person risk". It applies to organizations that have their fortunes tied up in the reputations of their leaders. Companies often take key person risk insurance out on their top executives in case of emergency. Those emergencies can include an untimely death, or departure from the company for unforeseen reasons, including bad behavior.

McDonald's is the latest company to face one of those emergencies. It announced that it has fired CEO Steven Easterbrook for a consensual sexual affair he was having with an employee. As part of his termination, Easterbrook will receive six months of severance. His total 2018 salary, including bonuses and stock options was $15.9 million. In an SEC filing, the company says Easterbrook will receive 26 weeks of his salary, benefits, and pro-rated incentives based on the company's performance to date.

If you have never read a publicly filed severance notice before, read this:

Easterbrook Separation Agreement

McDonald's is just the latest company facing an untimely departure of its chief executive. Intel's Brian Krantz was fired for similar reasons. CBS fired Les Moonves last year after accusations of sexual harassment were filed against him.

Investor Impact

But what happens to a company's stock following these untimely departures?Strategies can be thrown into disarray, partnerships can dissolve, investors can run for the hills... anything can happen. Ben Carlson, a wealth advisor and author of the terrific Abnormal Returns blog, asked a similar question. Then he worked with YCHARTS to track company performance after such events. The short answer... it's not good.

More News:

Activision Blizzard Earnings: What to Look For

Uber Earnings: What Happened

Odd Lot Trading On the Rise

(chart courtesy YCHARTS)

Things are looking up for U.S. oil producers. The trade deal with China, a major oil importer, is looking more likely. This buoyed U.S. oil exploration and production (E&P) companies. Cimarex Energy, Devon Energy, Pioneer Natural Resources, and Noble Energy all rose over 6.5%.

Clothing maker Under Armour dropped 18.9% today after it disclosed it had been under investigation for over 2 years by the SEC and Department of Justice for its accounting practices. Home builders also had a hard day today. NVR, Pulte group, and D.R. Horton fell 6.9%, 4.7%. and 4.1% respectively.

Word of the Day

Initial Public Offering (IPO)
An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors. The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes share premiums for current private investors. Meanwhile, it also allows public investors to participate in the offering.

Today in History

November 4, 1929

Today in 1929 the New York Stock Exchange announced that it would limit trading to three hours a day for the week. This was an effort to quell panic after the disastrous drops of the previous week, including the double-digit percent drops of Black Monday and Black Tuesday. This effort failed as trading volume spiked. The index fell another 5.8%, down a total of 32.4% in the previous two months.

Source: https://jasonzweig.com/this-day-in-financial-history/