12 Apr FIRST QUARTER EARNINGS SEASON COMMENCES TODAY
Markets were mixed ahead of the commencement of first quarter earnings season and data that confirms the economy is on solid footing.
Commenting about the data, weekly jobless claims are at the lowest level since October 1969, confirming last week’s plunge. The more reliable four week moving average is at the lowest level since December 1969.
At some juncture, a more noticeable increase in wages should occur. I must write however year over year wages are up about 3.2% as compared to 2.8% the year before.
There was little reaction to rising producer prices, prices that rose more than expected at both the core and overall level.
Commenting about earnings, all will scrutinize forward looking statements. As widely telegraphed, results are expected to decline around 5%. As of Monday, more than 20% of the companies in the S & P 500 had preannounced expected results and nearly 80% of them told analysts to lower their expectations.
Yesterday two Wall Street firms downgraded technology stocks given their massive run since December. Jeffries is now “moderately bearish” stating shares are ahead of fundamentals. Sanford Bernstein wrote the industry is “unjustifiably rich.” Both firms commented about the darkening profit backdrop that most have not yet begin to acknowledge, “an outlook which has worsened to levels not seen since at least 2012. “
Information technology companies are expected to report an 8.7% drop in first quarter profits according to Bloomberg. Overall tech earnings are expected to decline by 11%. Investors have not been deterred as they are willing to pay a premium that’s close to highest since 2000.
I think Amazon’s letter to shareholders offered considerable perspective about current valuations. Amazon sold about $232 billion of goods/services last year, up about 19% from the prior year. Wal-Mart sold about $500 billion of goods. Amazon’s sales growth was notably lower as compared to a 24% and 27% increase for 2017 and 2016 respectively.
According to the US census Bureau, total online sales rose about 14% as the traditional retailers have created on-line platforms thus suggesting Amazon’s growth rate is not that superior as compared to those of the traditional retailer.
I also think it is noteworthy that 90% of US retail sales still take place in physical stores.
The issue at hand is valuations. Amazon is up about 23% YTD and is worth about $910 billion, trading at a large multiple indicating great expectations of exponential sales and revenue growth. Wal-Mart is up about 7% YTD, has a market capitalization of $285 billion whose on-line sales is increasing around 18%, a similar rate as Amazons’.
How will this disparity unfold? Is this simplistic comparison between two retailing leviathans a possible reason for Jeffries and Stanford Bernstein’s bearish comments? Perhaps.
Last night the foreign markets were up. London was up 0.42%, Paris up 0.39% and Frankfurt up 0.64% . China was down 0.04%, Japan up 0.73% and Hang Sang up 0.24%.
The Dow should open moderately higher on JP Morgan’s earnings as well as stronger than expected credit growth in China. Oil and copper are both higher by 2% because of perceived strength in the global economies. The 10-year is off 12/32 to yield 2.55%.