Considering the start to the week, with Monday’s delayed reaction to disappointing December Jobs number, I think it’s fair to say that if we closed right here (basically unchanged from last Friday’s close), that it wouldn’t be a horrible result given all the news this week.
Let’s take a quick check on the earnings front. While the quantity of reports was minimal, the cross section of results should be wide enough for a quick report card:
– Starting with bank earnings, as they captured much of the headlines, in my opinion there were few read throughs for the broad economy aside from what appears to be stalled mortgage activity. Those companies that have relied on trading as a driver of revenue and earnings will likely be be constrained by regulation and fewer market opportunities due to low volatility. GRADE: B
-The retail disappointments were clearly the main event with some fairly dramatic price action in stocks like BBY and GME. While bulls explain away the massive misses as company specific, it is our sense that the secular headwinds for bricks and mortar retailers are immense and growing for those who are squarely in AMZN’s cross hairs. Once AMZN is done burying the big box electronic retailers, they will move on to others, oh maybe like BBBY, but their 20% decline last week was also a one off. While there have been a couple of bright spots like Macy’s and COST’s same store sales that were not as bad as expected, investors are shooting first and asking questions later as stocks like DECK have gone from multi year highs into correction mode in just a matter of days. Retail is the sector to watch in our opinion. If most can’t make it in the all important holiday season, they are likely to struggle after the ol’ gift card bonanza dies down early in the new year. GRADE: D
-As far as industrials go, there were 2 high profile misses. CSX missed earnings for the first time in 2 years and had cautious commentary. Prior to yesterday’s almost 7% decline the stock had just made a new all time high. This sort of plunge on news from an all time high is fairly troubling from a technical perspective. And just this morning, UPS, a stock that made a new all time high on the last tick of the year in 2013, missed on their Q4 and guided the full year 2014 down by about 4%. As such, the stock is trading down about 4% in the pre-market and now sits almost 9% from the recent highs. GM, also a stock that was a 2013 darling, had a difficult week. Despite announcing a quarterly dividend that will equal about a 3% yield, the company issued a less than stellar outlook for the current year. GRADE: C
One bright spot was GE’s just released results that appear to be inline to slightly better, the conference call is ongoing, but the stock is trading down a 1.5%, so the jury is still out.
-On the tech front, INTC was really the first large cap report. The chipmaker reported last night, and came in a penny light of consensus while offering a mildly cautious outlook. The stock is trading down about 4% in the pre-market, basically inline with the implied move from the options market. Given what we felt were heightened expectations heading into the print, this action on the news is not that surprising. 3D stocks were actually one sector that was weaker, after poor guidance from SSYS and XONE, though the stocks held up better than we would have expected after such news on momentum names. GRADE: C+
While this purely anecdotal grading system is from a small sample, I think it would be a tad premature to extrapolate too much, yet, to the remaining 450 plus S&P 500 companies yet to report Q4 results, I would suggest that with the S&P just a hair off of the all time highs, earnings season is not exactly off to a fantastic start. Now I wasn’t exactly a bookworm is schooled but if I brought home a report card that looked like the one above, lets just say my extracurricular activities might have come under some pressure.
The heart of earnings season kicks off next week. Some of the highlights include JNJ, VZ, DAL, HAL, TXN, XLNX, IBM, ABT, GD, UTX, COH, NFLX, EBAY, FCX, JCI, MCD, UNP, SBUX, JNPR, MSFT and PG. With more mega caps reporting, we’ll get a better sense of whether these initial trends are the real deal or just a false signal from a few outliers.