Wednesday, October 14, 2015

A Deflated Earnings Season

Just like the wall of Jericho, great fortresses can fall. Even Warren Buffett's portfolio is vulnerable to losses, especially in what may appear to be a bear market. This week, third quarter report cards of some of the largest financial players are being dealt out, and investors are trading reactively. Statistics are being thrown every which way to elicit a favorable response in stock price, and those listening are adjusting the equilibrium based on the respective change in fundamentals. As we switch mentalities from a macroeconomic perspective to a microeconomic focus, all eyes are on earnings reports that have been lackluster so far. Today, sour reports from Netflix and Wal-Mart weighed on media companies and retailers likely recoiling from the information revealed. Overall, the Dow Jones Industrial Average dropped about 150 points or -0.92%, and the S&P 500 skidded -0.47% by the end of Wednesday. Wal-Mart, a leading loser today, fell a whopping -10.04% to hit almost $60 a share on the day. This came after reports that EPS outlook dropped to $0.99 which is down from $1.08 in Q2. Investors took this as more than a signal of company weakness, but they also sold off many shares of cheap retailers like Target, Dollar Tree, and Dollar General which lost -3.50%, 3.28%, and -4.21% respectively. It seems bets are being piled against the expansion of money as disposable income continues to be squeezed by low levels of inflation and struggling wage increases. For that reason, politicians could see favorable sentiment surrounding minimum wage increases. NASDAQ losses of 0.29% were lead by disappointing earnings from Netflix. Amongst other distasteful figures, the streaming company cited a slow down of U.S. subscribers in Q3 compared to Q2. The total fell well below its 1.15 million projection at 880,000 and share prices suffered for it with post-market losses up to -3.03%. While indices appeared relatively weak today, most of the major losses could be attributed to poor earnings surprises. In reality, total volume on the NYSE was about even with 411 million bullish and 459 million bearish. NASDAQ traders were even more neutral with 935 million bullish and 951 million bearish. Sector performance had offset each other on the day with 4 out of 10 gaining.The two largest gainers today, basic materials and energy, traded in that way as commodity market movement showed more gains. With both the S&P and the Dow below support levels, we might see bounces off the 2,000 and 17,000 values to reverse losses today. WTI and Brent crude benchmarks both lost on the day at -0.69% and -0.18%, but oil and gas services gained. Perhaps positive movement could be attributed to a small weakening of the dollar, or short traders covering their spreads. Either way, the next big move among fossil fuel companies will be earnings revelations.

Oil and Gas Large Cap EPS Consensus
from WSJ
As a preview, I've compiled four of the large cap oil and gas stocks to analyze their consensus outlook. Nothing seems to be improving earnings-wise as every company has had to reduce outlooks from a month ago. No Q3 earnings-per-share projection is above the projected result of Q2 (HAL is about equal). Only CVX is looking to improve upon their disappointing 0.56 result in Q2 as their upstream operations proved to be extremely inefficient. Looking to Q3, projections into the last quarter look to be adjusted for a continuation of low crude oil prices. Energy firms will also be discouraged by a falling PPI (producer price index) which showed deflationary pressure increasing when the -0.5 loss trumped the projected result of -0.2. Overall, I would look for deflated numbers in earnings reports across the boards as consumption slows down along with overall confidence in the economic health of the country. On top of that, commodity-based companies and industrials will be hurt by lagging emerging markets and a constricted China. Both have already shown their effect through a drop in exports and the Fed's indecisiveness surrounding interest rate hikes. 

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