Hours pass. No, make that a week. Perhaps weeks. Listening, yet not hearing. A sudden flash of neon. Neon? That was the Chinese General Administration of Customs. March Exports beat March imports. By a country mile. Thirty minutes later, The PBOC reported New Loans for March that dwarfed expectations. Futures markets noticed this time. The quiet sideways movement of both global equity markets as well as U.S. equity index futures markets sloped upward, completely changing the complexion of the overnight session.
The Walt Disney Co. (DIS) had just presented the coming "Disney+" platform for streaming entertainment to the planet's more than 7.5 billion humans. In a few hours, attentions will turn yest again... to the large U.S. banks, such as JPMorgan Chase (JPM) and Wells Fargo (WFC) , as those firms receive the opening kickoff. A new season begins.
Back to the numbers emanating from Zhongguo. Traders and algorithms alike took the data very well. Exports from China grew 14.2% year over year in March versus expectations for growth of 8.7%. This came on top of a 20.7% y/y decline in February. The trade surplus for the month in dollar terms printed at $32.64 billion versus consensus of roughly $6 billion. Remarkable. Numbers that print around the Lunar New Year are always a tough read. The PBOC has been aggressively dovish. Manufacturing PMIs that hit the tape two weeks ago had suggested that maybe for now, the Chinese economy might be feeling around for a bottom. Let's take a look at loan growth.
There you have it. New Loans in terms of yuan nearly doubled in March to Y1690 billion from February's Y886 billion. Aggregate Financing for the month beat expectations by more than Y1000 billion. Why do I write to you in the middle of the night to tell you all this, old friend? Simple. Traders are buying into the growth story at zero dark thirty this morning (Friday). Loose monetary policy seems to have for now saved the Chinese economy from going off a cliff. At least that's what is impacting early morning trade. But Sarge, Chinese imports for March declined by 7.6% y/y, much worse than expectations. Does that read poorly for Chinese demand? Huh? Hey, Disney... no, I mean the banks. Um.... what were you saying again?
I understand. Some of you will read this morning's note after the high profile trio of JPMorgan Chase, Wells Fargo, and PNC Financial (PNC) go the tape with their first quarter results. Consensus projections found at FactSet are for Q1 EPS growth of -4.2% across the S&P 500 on revenue growth of +4.7%. For the financial sector, it looks more like EPS of -3.8% on revenues that grew 4.8%. So, while the KBW Nasdaq Bank Index has underperformed the broader large cap equity market, at least just prior to earnings season, it is widely felt that the sector may have slightly out-performed corporate America over the past three months.
There are several metrics that will be measured across all of the major players here that analysts and investors alike must take into account. Understand that most traders think that banks in general stand to benefit from a rate rising environment. This is somewhat true, but in fact, is simplistic, first level thinking. The problem is that when the Fed (or any central bank) pushes short term rates (such as the FFR) higher, and the market does not take care of the long end of the curve, that the curve must flatten, or even invert (as we have seen). This is symptomatic of a lack of expectations for increased economic growth and/or consumer level inflation. The result for the banks is that net-interest margin is then compressed. This is how money is made through traditional banking, and if this metric does not fall into place correctly, another key metric... that of Loan Growth, then becomes a potential negative no matter how robust the number. Keep in mind that if profitability resultant from traditional lending is reduced greatly, then even aggressive loan growth represents more of an increase in lender risk than in potential for profit.
Should the banks find that profits are not quite there from the lending game, they are then forced to rely on a regimen of consumer fees to make up some of the difference. That and the trading environment. Clearly, given the past three months across both debt and equity markets, this should be a clear positive across the space. The real result for watchers of the banks this quarter (or any quarter) will be in Return on Equity, and in Tangible Book Value. This is how we decide just how cheap the shares are... and going in, they look pretty darned cheap. Yet, I have been underexposed to the banks for a long time now. We'll see.
When All Else Fails, Send in the Wookie
The Mouse Strikes Back. More precisely... fear the bundle, if you are Netflix (NFLX) . Streaming services were the only stars that the Walt Disney Co. needed on Thursday night. The highlight will be the "Disney+" service that will not even be available until November. The bundle will include not only that platform, but "ESPN+" (I signed up as soon as that one was available, it's great, and it'a a value at price), Hulu (now Disney majority-owned, another service that I find fantastic, and a value), and in India, Hotstar (300 million active users, acquired as part of the Fox deal).
"Disney+" will be available across game consoles, and smart TVs, as well as mobile devices, and will include both legacy and original content. It will be able to handle a rough 10 million concurrent viewers from the get-go, will be able to offer downloadable programming for off-line viewing, and oh... did I mention that the service will run the consumer $7 per month, or barely more than half of what the standard Netflix subscription runs for? In fact, the entire Disney+, ESPN+, Hulu bundle runs for less than $20, without any discounting. I'd say, while I do enjoy some Netflix programming, that the loss of content to other streamers and the need to create homemade programming forced the imposition of those recent price hikes. My thought is that viewership will suffer, there will be a need to walk back those recent price hikes in the face of greatly improved competition, and that margins will face certain pressure. Already a $15 billion budget for content this year. That's not likely to head lower next year. Just an opinion.
DIS, the stock, is trading above $120 in the dark hours. I am long the name, and I have a $140 price target. That said, I would be real careful if I were a retail investor looking to gain entry about paying these prices on this day. If that individual can wait, there will (if I am correct) be some wiggle room created for better entry. After all, Disney expects to run the service at an operational loss for several years before the streaming business becomes a bottom line net positive.
You Kids See...
- That Nomura thinks the bottom for memory chips may be extended from the second quarter into the third? That impacts Micron (MU) , and Western Digital (WDC) for U.S. investors. Apparently, Nomura is of the belief that memory chip pricing continues to suffer due to oversupply, and the industry will feel forced to continue to sacrifice profitability at the altar of market share before seeing a recovery... perhaps not until next year.
- That Chevron (CVX) has agreed to acquire Anadarko Petroleum (APC) for $33 billion in cash and stock. The deal values APC shares at $65 a piece. Those shares closed on Thursday night at $46.80. and as I bang out this note are trading around $60. CVX is off a rough 1% in the early going, but this news is still developing as I go to publication. Chevron has announced that should the deal find approval, the firm will likely increase their share repurchase program. Keep an eye on the whole space this morning.
Economics (All Times Eastern)
08:30 - Import Prices (Mar): Expecting 0.4% m/m, Last 0.6% m/m.
08:30 - Export Prices (Mar): Expecting 0.3% m/m, Last 0.6% m/m.
10:00 - U of M Consumer Sentiment (April-adv): Expecting 98.1, Last 98.4.
10:30 - Natural Gas Inventories (Weekly): Expecting -73B cf, Last -86B cf.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 831.
Today's Earnings Highlights (Consensus EPS Expectations):
Before the Open: (FRC) (1.22), JPM (2.35), PNC (2.61), WFC (1.11)