21 Apr ANOTHER RELATIVELY QUIET DAY
Last week I commented about a possible short cover rally in the Treasury market, perhaps a reason why yields dropped about 10 basis points in quick order. JP Morgan wrote yesterday that since last week its clients had “ramped up short positions by the most since 2018.” Is this a harbinger of things to come given that inflationary expectations are continuing to rise?
Regarding equities, led by the technologies, equities yesterday again sold quietly off. There was no specific catalyst.
Bloomberg states US equities are trading at a valuation that’s about 45% above the average of the past decade. The S & P is trading at the highest forward looking multiple since 2002 according to the Newswire.
Earnings growth—propelled by the reflation trade–is expected to be the best in two years. One of the biggest concerns is whether companies are equipped to handle mounting inflation pressures as the economic recovery gains momentum.
Generally speaking there are four ways to handle increased costs. Rise prices, absorb price increases, reduce other expenses, or increase productivity. Productivity gains and the reduction in “other expenses” may be difficult for a myriad of reasons. Increasing prices rises inflation and absorption of higher costs impact margins.
With the averages trading at such a large percentage above its historical norm, there is no room for error. This can be a transitional earnings season. In a rising rate environment, tangible assets that have price flexibility historically outperforms intangible assets.
After the close, NFLX posted results, results that disappointed the markets given shares immediately dropped 12% or $30 billion from closing levels. To write it differently the decline in the value of NFLX was more than the capitalization of S & P 500 members 251-500.
Wow! Talk about velocity of change!
Several times I have opined many of the mega sized technology companies have front loaded 5-6 years of revenues in 12 months but shares are priced as though this growth rate will continue into perpetuity. Is NFLX a harbinger of things to come given its subscriber growth rate was 33% less than expected, and its forward guidance is predicting a current quarter growth rate “the slowest in its history” amounting to a 87.5% decline from its 4Q20 pace?
We will know this answer in about two weeks.
Last night the foreign markets were mixed. London was up 0.43%, Paris up 0.71% and Frankfurt up 0.29%. China was down 0.02%, Japan down 2.03% and Hang Seng down 1.76%.
The Dow should open nervously flat digesting a major earnings disappointment, hoping that it is not a harbinger or results to come. The 10-year is off 3/32 to yield 1.58%.