foxex: Diverging

Read in Browser

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Tuesday's Headlines

1. US markets trudge higher, led by tech

2. Oil prices spike 24%

3. Disney reports mixed earnings as park revenue collapses

4. Consumer debt levels reach record high

5. Manufacturing and services collapse in April

Markets Closed

Dow
23,883.09
+133.33 (+0.56%)

S&P
2,868.44
+25.70 (+0.90%)

Nasdaq
8,809.12
+98.41 (+1.13%)

VIX
33.63
−2.37 (-6.56%)

Bitcoin
$8,963.26
+$39.78 (+0.45%)

US 10-Yr Yield
0.657
+0.02 (+3.14%)

Image credit: Tim Robberts/Getty

Markets Today

U.S. and global markets marched higher today as investors are hoping for the economy to pick up steam sooner, rather than later. Tech stocks took the lead again, driving the Nasdaq up more than 1%. That index is nearly flat for the year and down just 10% from record highs.

Meanwhile, the economic news continues to sour. U.S. consumer debt levels rose to their highest levels ever last quarter. You know what that means for this quarter, right? Business activity in April also plunged the most in history, and there are signs everywhere that it will take a long time to make up that ground.

We also heard from health officials today that COVID-19 has already mutated. Between that and the murder hornets invading our hives, we are starting to resemble a Bosch painting.

On the flip side, Fed officials in the U.S. are saying that the economy may start to grow again in the third quarter as economic activity picks up. Oil prices jumped 24% today, rising for the fifth day in a row. Those may or may not be connected.

There is divergence at every turn.

Chart courtesy TradingView

Headlines:

Disney reported a 58% drop in operating income from parks and cruises, its worst-hit segment of its business. Revenue from its media networks surged 28%, while its direct to consumer and international businesses, which include Disney+, grew 100%, pulling in $4.12 billion. Disney will forego its dividend payment for the first half of the year. This is the first earnings report with Bob Chapek at the helm of Disney, after former CEO Bob Iger announced in February he would transition to the role of executive chairman.
United Airlines (UAL) is cutting management and administrative staff by 30% in October. Shares of UAL fell 4.5% today and are down 72% year-to-date.
Regeneron Pharmaceuticals said an experimental antibody treatment for COVID-19 could be available as soon as this fall, an expedited timeline for a drug that's scheduled to be studied in humans for the first time in June.
Pfizer (PFE) shares rose 2% today after the company said it is beginning testing of a COVID-19 vaccine on humans in the U.S. It has partnered with Germany's BioNTech and said the vaccine could be ready by the end of the year for distribution if it proves safe and effective. There are currently eight candidates in clinical evaluation, according to WHO, including one from U.S. biotech Inovio Pharmaceuticals.
Shares of Hertz (HZT) fell 16% today as it is reported to be preparing a planned bankruptcy filing. It missed a lease payment last week and is looking to restructure $17 billion in debt.
AmerisourceBergen has approached Walgreens to buy its pharmaceutical wholesaling division (Alliance Healthcare), according to Reuters. The drug distributor is willing to pay as much as $6 billion, says the report.
L Brands and Sycamore Partners have terminated their deal for the private equity firm to buy a majority stake in Victoria's Secret. Sycamore complained that the closing of 1,600 lingerie stores due to the outbreak breached the terms of the deal. L Brands announced its go-forward strategy of establishing Bath & Body Works as a pure-play public company and Victoria's Secret as a standalone company.
The Securities and Exchange Commission has temporarily relaxed rules for small businesses looking to raise funds through Regulation Crowdfunding. This method allows companies to sell up to $1.07 million of their securities without having to register the offering with the SEC. Read the press release and new rules here.
U.S. household debt increased by $155 billion, or 1.1%, to reach a record $14.3 trillion in the first quarter of 2020. Mortgage balances rose by $156 billion, while non-housing debt balances remained relatively flat. Credit card balances declined by a larger-than-expected degree, based on seasonal patterns, but it is too soon to confidently assess any connection between this decline and the coronavirus outbreak.

The Good and Bad News About Consumer Debt

First the good news:

Credit card balances fell by $34 billion.
Less than 1% of current mortgage balances became 30 or more days delinquent last quarter.
75,000 people fell into foreclosure, which sounds high, but is relatively low by historical standards.

Now the bad news:

Credit card balances fell because consumers stopped spending as the lockdowns began in March.
Student loan debt now totals $1.54 trillion. Some 10.8% of the debt was 90 days or more delinquent.
This report was for the first quarter, when only the month of March was impacted by the lockdown.

Side note: There was $662 billion in newly originated mortgage debt in the first quarter. A lot of that was driven by refinancing as interest rates fell following the emergency rate cuts. While only useful for homeowners, it does reduce their monthly payments at a time when they may need to conserve cash.

Business Activity Plummets in April

The IHS Markit U.S. Services PMI report for April told us what we could already see outside our windows and along the empty streets of our cities and towns. Business activity collapsed to a record level.

As IHS puts it, "The rate of contraction accelerated to the fastest on record as client demand slumped and many businesses closed temporarily. New order inflows fell significantly as customers postponed or cancelled orders amid ongoing global lockdowns. Subsequently, expectations for the year ahead sank to their most pessimistic in the series history. Uncertainty and a further reduction in confidence led to the steepest decrease in workforce numbers on record."

The bad news is IHS sees things getting much worse this quarter, especially since service businesses like airlines, bars, restaurants, cinemas, sports arenas, and other recreational activities will likely be at the back of the line in terms of being able to re-open to anything like previous capacity levels.

That's going to make for a slow recovery.

chart courtesy YCharts

All-Time Highs

Meanwhile... in the stock market, there are some very interesting companies making all-time highs as our economies have been transformed.

Video game makers Electronic Arts and Activision are enjoying the fruits of the kids stuck at home syndrome. PayPal is working its way through the digital economy and payments ecosystem in every way it can. And Wayfair is cashing in on all the home decorating and improvements we are spending our disposable income on.

These are not the foundations of a robust capital market, but they are a representation of where we are today.

More News:

Activision Blizzard Earnings: What Happened

Disney Earnings: What Happened

Fed Spurs Corporate Bond Bonanza

SPONSORED BY INVESCO
The Complete Guide to ETFs
ETFs are becoming increasingly popular and soaring to new heights among investors. Invesco's insights can help you determine if these investment vehicles are right for you.
LEARN MORE >

(chart courtesy YCHARTS)

Shares of IPG Photonics are up nearly 21% after the results of the fiber lasers manufacturer's Q1 earnings report surpassed analyst estimates. Similarly, Jack Henry & Associates' stock price rose by almost 9% today due to the payment processing company's third-quarter earnings beating the Zacks Consensus Estimate.

Shares of Norwegian are down 23% following the cruise line warning investors of the possibility of bankruptcy, in light of the ongoing halt on voyages. Other cruise line stocks, including Royal Caribbean (10%) and Carnival (over 8.5%), are down on the same news. WestRock's stock price fell by over 16.5% after the corrugated packaging company reduced its dividend in an attempt to preserve liquidity.

Word of the Day

Consumer Debt

Consumer debt consists of personal debts that are owed as a result of purchasing goods that are used for individual or household consumption. Credit card debt, student loans, auto loans, mortgages, and payday loans are all examples of consumer debt. These stand in contrast to other debts that are used for investments in running a business or debt incurred through government operations.

photo courtesy deutschland.de

Today in History

May 5th, 1818:

Karl Marx is born in Trier, Germany. His life's work will inspire some of the most constructive reforms to capitalism, such as safer factories and expanded rights for workers. Marx was a philosopher, author, social theorist, and an economist. He is famous for his theories about capitalism and communism. Marx, in conjunction with Friedrich Engels, published The Communist Manifesto in 1848; later in life, he wrote Das Kapital (the first volume was published in Berlin in 1867; the second and third volumes were published posthumously in 1885 and 1894, respectively), which discussed the labor theory of value.

https://www.investopedia.com/terms/k/karl-marx.asp