Where The Wild Things Are
Folks of a certain age will recall the controversial children's book authored by Maurice Sendak, and published in 1963. Simply my favorite book as a young child, this is the story of Max, a boy who is sent to bed without his supper, falls asleep, and ends up dreaming about a forest filled with monsters. Max goes through a number of emotions, and eventually becomes king of these monsters. Those of you making a living in the financial markets don't have to dream about forests filled with monsters. The real life wild things? Oh, those are in your portfolio, for better or worse.
I'll let you in on a little secret. My best trades, not investments, but short-term trades this earnings season have been made not ahead of earnings releases, but after. After what? After hours? Well, lately... yes. After the algorithms react and force those who lined up on the wrong side of the ledger to taste some bitter medicine in order to cut risk. Shorting the move once it seemed to level worked in Netflix (NFLX) , and it worked in Tesla (TSLA) . How about Amazon (AMZN) ? Was Amazon a purchase last night? It still might be. The stock is now less than $100 below the Thursday night close. I remain flat. We'll have to go into this, but the wild things are on the loose. A tough environment, in light volume crossed against a perverse method for price discovery. They say that price is truth. Oh, I agree that price is fact, a fact that good or bad, one must respect, but truth? That's a higher standard. Not done this way.
My very Irish grandmother used top babysit us all. My siblings, my cousins. Basically an army of dirty faced kids. She used to serve us a dinner that she called Hungarian Goulash. I don't think it was a very authentic goulash, but more likely it was whatever Grandma had in the fridge that had not yet spoiled, and then combined into one big dish. We all ate eagerly, and complimented Grandma, though we could not understand why the meal was different every time that we ate it.
Now, can the Dow Jones Industrial Average be considered any kind of market measuring barometer when the index sells off small, while the S&P 500 rallies moderately and the tech heavier Nasdaq Composite simply rallied, making no bones about it. Now, for the blue chips. Is it meaningful if Dow (DOW) , Visa (V) , United Technologies (UTX) , and Microsoft (MSFT) all roar, while 3M (MMM) , Johnson & Johnson (JNJ) , and McDonald's (MCD) all whimper?
For the record, as we just kind of implied, it was the Information Technology Sector that easily led equities on Thursday, and that was simply because both the semiconductor and software industries ran hot at the same time. Trading volume ran higher at both of New York's exchanges. So, was the volume meaningful? I don't know.
Wait... Sarge. You don't know? No... I don't. I mean, yes, the Nasdaq Composite ran 0.81%, the Nasdaq 100 was even stronger, up 0.98%. That makes it difficult to wrap one's head around the fact that losers beat winners (at both exchanges) up at Times Square by a rough 17/14 split, yet advancing volume beat declining volume 5 to 4. Spin the wheel, play stupid games, win stupid prizes.
Earnings season might be making a lot of noise, but at least high ranking officials of the Federal Reserve have piped down for now, as we have entered into the "eight times a year" blackout period. Ahh. Futures markets in Chicago are currently pricing in a 93% probability for a reduction to made to the Fed Funds target rate next week. Those same markets now only price in a rough chance of 25% that an additional cut might be made in December.
Perhaps of more importance, but receiving far less attention is the fact the the Fed felt the need earlier this week to expand it's minimum offering for overnight repo operations from $75 billion to $125 billion, while also increasing the 14 day repos from $35 billion to $45 billion. Most market participants have put this story on the back-burner as it really does not impact in real time what most of us do. The facts are though that this story has not gone way. Quarterly tax deadlines? Holidays in Asia? Yeah right. This condition should have passed if those impacts were reasons for causation. More likely these impacts were symptoms that exacerbated whatever it is that has gone missing from overnight cash markets at that time. Something (don't say "liquidity", wise guy) is missing.
Is it a matter of trust? I really can't tell you. If there is an issue somewhere concerning counter-party risk, then this will eventually be an issue that becomes systemic in nature. This would explain the aggressive nature of the central bank's balance sheet expansion program, a program that I support largely because it pressures the yield curve correctly as opposed to past QE programs that were incorrectly applied.
Not much you can do about this from your end, other than staying nimble, and staying balanced to include keeping something off-grid. I am not Chicken Little. I am not telling you that the sky is falling. I am simply stating that there is a sky, and that it could fall, and that if it falls, we're all going to have bigger problems.
Welcome To The Jungle
Just a kid from Queens walking patrol. So, this is the rain forest. Wow. So humid. Can't breathe. So wet. Look at the size of those ants. Snakes. Hate snakes. Man, the overnight is going to stink. Maybe I can make myself into a human burrito wrapped in my poncho. Will that keep the critters out? What... the... heck... was... that? Howler Monkeys? I just told you. I'm a kid from Queens. I don't do Howler Monkeys.
Amazon reported third quarter financial performance on Thursday evening. The Howler Monkeys showed up. Mayhem ensued. The firm posted EPS of $4.23, a rather nasty miss on the bottom line. The top line looked fine. Revenue printed at $69.98 billion, topping consensus, and good enough for year over year growth of 23.7%. There's a lot of good, and a lot of "not so good" when one looks at the numbers inside the numbers. In the end, the reason for the stock's extreme overnight selloff could simply be explained I think not so much by the EPS miss, but by slowing growth in what has been working, and of course in lackluster guidance moving forward.
Despite the seemingly robust print for net sales, as I pore over the financial tables provided by the firm, perhaps the most alarming line that I see is in Q3 operating income. That line hit the tape at $3.157 billion, down from $3.724 billion for the same period in 2018. That's a contraction of 15.2%. So, we already know that net sales grew 23.7%. It appears that operating expenses printed at $66.824 billion, a 26.4% increase from Q3 2018. Obvious it becomes that what we have here is a severe contraction in margin. The question now becomes one of valuation. The firm is spending more, and perhaps not quite prioritizing profit. Let's check on the firm's growth engines to see what's under the hood, shall we?
Hot or Not?
The inline store remains hot. Growth there shows that this business might not be as mature as previously thought. The story is in the cloud and in advertising though. That's where elevated valuation lives in 2019, and there are some cracks in the sidewalk. Amazon Web Services (AWS), like Azure at Microsoft (MSFT) shows signs of slowing acceleration. AWS contributed revenue of $8.995 billion, below expectations, good for growth of 35% (Azure's growth "slowed" to 59%).
I want you to read the following very carefully. Operating Income attributable to AWS came in at $2.261 billion (+9%). I just told you that operating income for the whole firm declined to $3.157 billion. AWS is worth 71.6% of the entire firm's operating income. If AWS is suddenly more fragile, and if AWS is where the margin is... then Amazon must spend hard on defending this industry leader. This is one reason why guidance is tough. The firm faces not just competition form Microsoft's Azure, but the emergence of the Google Cloud - Alphabet: (GOOGL) - and even Alibaba (BABA) as significant players in this space.
All we know about the firm's advertising business is that it is thankfully growing like a weed. The advertising business is lumped into a segment defined as "Other Sales." Other Sales is a small (still good for revenue of $3.586 billion), but rapidly growing unit. That revenue number represents growth of 44%, and advertising is growing faster than the unit as a whole. Supposedly.
For the fourth quarter, Amazon is projecting net sales of between $80 billion and $86.5 billion. That would be year over year growth of 11% to 20% if accurate, at the mid-point this would be the slowest pace of revenue growth for Amazon in four years. Guidance for operating income is even worse. The firm now looks for anything between $1.2 billion and $2.9 billion on this line. You could probably drive a truck through that guidance. The problem is that even at the high end of the range, this will be down considerably from $3.8 billion prior as well as way below consensus view of $4.19 billion.
The firm will also be ramping up expenses this holiday season related to one-day shipping as those costs are only going higher. More margin compression.
Will I buy some AMZN today? I might. That's the best I can do. Am I willing to invest in the stock? More so than yesterday, but heck, this is a trade for now. The intra-day MACD will be more important today than anything the analyst community throws at us. The truth is that I will probably be in and out of this name several times before they ring the bell twice. I promise you this though. I will be flat when that second bell stops ringing.
Economics (All Times Eastern)
10:00 - U of M Consumer Sentiment (March-F): Flashed 96.0.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 713.
The Fed (All Times Eastern)
Fed Blackout period through 31 Oct 19.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (SRI) (.37)