Skip to main content

Morning Update

With no economic news scheduled today markets are likely to be driven primarily by earnings news. Internationally, Germany approved a bailout of Spanish banks, which occurred on the heels of a weak bond auction in Spain. Spanish 10-year bond yields are trading at an unaffordable 7.1%.

Yesterday after the close Microsoft reported its first ever loss as a public company. FQ4 EPS beat consensus estimates, coming in at $0.73 on revenue of $18.6 billion (+7% Y/Y) by $470 million. Enterprise strength drove the earnings: Office division sales were up 7% Y/Y while Server and Tools were up 13% Y/Y. This strength offset at 1% drop in Windows sales. Entertainment and devices sales were up 20% Y/Y. The quarter’s net loss of $492 million occurred due to a one time write-down of Microsoft’s acquisition of aQuantive. We found these earnings to be very strong and expect a bullish tone in Microsoft’s stock leading up to the release of Window’s 8 this fall.

Google also reported earnings after yesterday’s close. Traditionally Google will either beat or miss consensus estimates of its earnings by a large margin, causing its shares to make dramatic moves in the after-hours market and following day. This quarter however, Google’s EPS of $10.12 beat consensus estimates by just $0.08 on revenue of $8.36 billion (+21% Y/Y), which missed consensus estimates of $50 million primarily due to the economic turmoil in Europe and currency volatility. Google’s site revenue jumped 21% Y/Y while ad network revenue increased 20% Y/Y. Ad click prices declined 16% Y/Y but increased 1% Q/Q, halting recent declines. Paid clicks were up 1% Q/Q and up 42% Y/Y. Declining ad click prices show the impact of mobile devices: users are less likely to click on ads when they see them on mobile devices. As more and more internet searches occur on mobile devices, Google’s ability to profit from those ads is diminished. However, Google in combating this by providing intelligent results so that users are only seeing ads they are likely to click on. This strategy is paying off with paid clicks up sharply Y/Y. As expected Motorola’s revenue was $1.25 billion and experienced an operating loss of $39 million. Google did not elaborate on their specific plans for utilizing newly acquired Motorola.

Notable earnings before today’s opening bell include General Electric, which narrowly beat earnings with Q2 EPS coming in at $0.38, a beat of $0.01. Revenue was $2.09 billion (+1.4% Y/Y), a miss by $20 million. Schlumberger and Baker Hughes both beat, showing strength in the oil services sector during a quarter with falling oil and gas prices. Executives at the two companies were “cautiously optimistic” about the future.

Vodafone announced a 7.7% decline in sales, saying on their conference call that “it’s difficult to be optimistic the near-term changes in things.” Vodafone is the world’s second largest mobile phone carrier with the bulk of its business occurring in Europe and emerging markets.

Today we will be watching the trading action in Apple, Visa, Western Digital, Netflix, and UPS as traders begin positioning themselves for their earnings announcements next week.


Popular posts from this blog

Wake Me Up When September Ends

The fiscal year for the U.S. Government ends September 30th, 2017. Which is something market participants could care less about if not for, sometime near that date, Congress needs to raise the debt ceiling. Missing that deadline would result in a self-inflicted financial wound that would send shock-waves throughout global markets.  The U.S. Government has been paying off debt since the Andrew Jackson administration without missing a single payment. Raising the debt ceiling is a routine vote.

In fact, with the polarized Washington we have seen in recent years, it is happening a lot more frequently, as Congress has only once passed a budget in the past eight years. In lieu of a budget, Congress passes what is known as a continuing resolution.  A continuing resolution is a type of legislation in which Congress decides to let last year’s budget continue as this year’s budget. Nevertheless, a continuing resolution is incomplete, as it does not allow for the government to spend the money a…

I would like to bet ten tens on the tenth horse in the tenth race, please.

"I would like to bet ten tens on the tenth horse in the tenth race, please."

Last summer, on a warm cloudy day June 11, 2016 in Elmont New York, a good friend of mine (Rob) confidently walked up to the cashier at Belmont and spoke those famous words.  Ten Tens on Ten in the Tenth Race.  In fact, it had been decided it months earlier. We had been discussing hosting his bachelor party in New York, go to the Belmont Stakes, and watch a Yankees vs Tigers game and Rob convinced the group to go to New York by proudly proclaimed his prophecy.  I had almost forgotten about this bold prediction when I witnessed him at the register, but when I looked up, and saw Flintshire, the 10th horse in the race upcoming race was the favorite.  “What could possibly go wrong?”  I thought to myself (an options trader who bought a racing program attempting to handicap and gain an ‘edge’ in the previous nine races unsuccessfully).  I went to a pretzel vendor and changed 5 twenties into ten tens, wal…

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower. 
Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007). 
So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. As the summer hit, FANG has slowed with GOOGL and AMZN hitting…