"I'll tell you how the sun rose,--
A ribbon at a time
The steeples swam in amethyst
The news like squirrels ran
The hills untied their bonnets
The bobolinks begun
Then I said softly to myself,
"That must have been the sun!"
But how he set, I know not.
There seemed a purple stile
Which little yellow boys and girls
Were climbing all the while
Till when they reached the other side,
A dominie in gray
Put gently up the evening bars,
And led the flock away."
- Emily Dickenson
A Day, Indeed
Traders and investors worked long hours on Thursday as the European Central Bank increased its benchmark interest rate, the Main Refinancing Rate, by 75 basis points to 2%, the highest level for that rate since 2009. The ECB pledged to continue increasing borrowing costs in the short to medium term in order to slow inflation. It all seemed Fed-like enough. Until...
Until ECB President Christine Lagarde added that the ECB was not "oblivious" to the likelihood of an oncoming recession, despite predicting fairly recently that the eurozone might avoid outright contraction. Lagarde acknowledged on Thursday that something like that was now "looming much more on the horizon."
Was this the setup? Did the ECB set up that central bank's next policy meeting on Dec. 15 for some kind of a pivot, or at least a slowdown in the pace of tightening the trajectory for monetary policy? After both the Reserve Bank of Australia and Bank of Canada have taken less aggressive steps toward tightening at their most recent policy meetings than many had expected? What does this mean for the Fed next week? Is this semi-pivot, or at least a softening of language, part of a globally coordinated plan? Smells like a possibility.
The day would only get more interesting from there, and I up with those interested listening to either the Apple (AAPL) or Amazon (AMZN) post-earnings conference call and reading the transcript of the other. I came in long both names, far more exposed to Apple, after earnings released earlier this week provoked by reduction of exposure to Amazon. Thank goodness. Still, I traded both stocks overnight, and wow. Did I make lemonade out of some lemons. That was the plan. A little more exciting than I would have liked. That's for sure. We'll get to those stories. First, GDP.
The Third Quarter
According to the Bureau of Economic Analysis, the US economy grew 2.6% quarter over quarter (seasonally adjusted annual report) during the third quarter. This ended the textbook contraction, or recession by definition experienced throughout the first half of the year, as the economy had contracted 1.6% (q/q SAAR) during the first quarter and also contracted 0.6% (q/q SAAR) during the second quarter.
Huzzah? The recession is over? Did it ever begin? These are the questions that serious economists have been asking each other.
What's interesting is that the contribution for personal consumption expenditures dropped off from the second quarter as consumption of durable goods contracted outright for the third quarter in the last four. Gross domestic investment printed in a deep state of contraction for a second consecutive quarter. The real strength in this report was in the trade balance where exports of both goods and services grew dramatically, while imports, and imports of goods in particular, fell off of a cliff.
Is that a positive, or reflective in conjunction with the slowing acceleration in personal consumption of reduced demand here at home? Just as the first quarter's -1.6% was really the result of a negative trade balance and therefore cast a doubt on the validity of the first-half 2022 recession, the level of growth in this report was really the result of a swing of the trade balance to the positive side. Joe Brusuelas, US chief economist at RSM, was quoted on Thursday as saying that US Q3 GDP would be "plodding along at a 0.5% seasonally adjusted annualized rate" excluding the trade contribution.
The fact is that excluding that trade contribution all three quarters this year would have exhibited very little in the way of either growth or contraction. The economy is stagnating. That's a fact. US consumer activity is withering. That's another fact.
Treasury markets responded to the "robust" 2.6% GDP print by simply crashing the most important yield spread (10-year /3-month) in terms of projecting a coming recession....
Looks like the bond market is calling "bologna" on any prospects for 2023 economic growth. As my friend and colleague Peter Tchir of Academy Securities wrote last night, "The longer the Fed sticks to hiking based on old data and not allowing the effects of earlier hikes to kick in, the more risk we get of a hard landing."
Anyone else notice...
... that the average 30-year fixed mortgage rate increased, according to Freddie Mac, to 7.04% from 6.94% the week prior? This was the first week since 2002 that this weekly series printed above 7%, and came one day after the MBA (Mortgage Bankers Association) reported an average 30-year mortgage rate of 7.16%.
The Regular Session
Then, the bell rang. Equity market action reflected Wednesday evening's overbearing weakness in Meta Platforms (META) after that bizarre earnings report and outlook with the Tuesday evening weakness in both Alphabet (GOOGL) and Microsoft (MSFT) still resonating. Thursday, if it was a movie, in retrospect could be called "Revenge of the Old Economy" as the Dow Jones Industrials tacked on 0.61%, the S&P 500 gave up 0.61% and the Nasdaq Composite surrendered 1.63%. Old-school names such as Caterpillar (CAT) , Boeing (BA) , McDonald's (MCD) , Ford Motor (F) and Merck (MRK) all turned in winning performances.
Six of the 11 S&P sector-select SPDR ETFs managed to shade green for the day, led by the Industrials (XLI) . The weakness was once again felt in the growthy-type groups as Technology (XLK) and Communication Services (XLC) once again took places 10 and 11 on the daily performance tables. This despite the rip-roaring run turned in by ServiceNow (NOW) .
Interestingly, aggregate trading volume decreased significantly on Thursday from Friday for names listed on the New York Stock Exchange, for Nasdaq-listed names, and across the Nasdaq Composite, but not across the S&P 500. Does that mean that the "old school" portion of yesterday's trading volume carries more validity than what transpired in growth? Or are the pros now far less exposed to growth and now just trade it less?
For that matter, winners beat losers at the NYSE by a small margin (17 to 14), while losers beat winners at the Nasdaq by an even slimmer margin (12 to 11). Advancing volume took an almost impressive (given the day) 52.1% share across NYSE-listed names, but only a 30.5% share across Nasdaq listings. Tale of two markets?
The closing bell had barely rung its last when Amazon (AMZN) earnings hit the tape. The stock sold off immediately. Apple (AAPL) sold off alongside, in sympathy to a lesser degree. I added to my AAPL long on that weakness with no intention to add to my far smaller AMZN long. Then AMZN traded down into the upper $80s and I had to take action. I ultimately tripled the size of that position (recall that I had halved that AMZN long on Tuesday evening after seeing those other tech wrecks). The idea was to take the average point of entry (net basis) of my still not very large remaining position in AMZN below $100, which I did ($99.28). AAPL actually responded well to earnings and to the call after an initial selloff. As I do not have all the time and space in the world, I will try to cover Amazon earnings here and come back in a couple hours with some Apple coverage.
For the third quarter, Amazon posted GAAP earnings per share of $0.28 on revenue of $127.1 billion. These numbers represented an earnings beat on a revenue miss and earnings "growth" of -10% on revenue growth of 14.7%. Excluding a $5 billion negative impact from foreign exchange rates, net revenues would have increased 19%.
North American sales increased 20% to $78.8 billion, while international sales decreased 5% to $27.7 billion, but would have increased 12% ex-foreign exchange.
Operating income/loss decreased to $2.5 billion from the year-ago comp of $4.9 billion, North American operating income dropped to -$400 million from +$900 million, while international operating income/loss fell to -$2.5 billion from -$900 million. The saving grace was in Amazon Web Services, where operating income increased to $5.4 billion from $4.9 billion.
Operating cash flow decreased to an outflow of $19.7 billion over the past 12 months from an inflow of $2.6 billion for the 12 months prior as free cash flow decreased to an outflow of $21.5 billion over the past 12 months from an outflow of $3.9 billion over the 12 months prior.
Revenue by Segment....
Online Stores generated revenue of $53.489 billion (+7%, +13% ex-FX). This fell short of estimates.
Third-Party Seller Services generated revenue of $28.666 billion (+18%, +23% ex-FX). This beat estimates.
AWS generated revenue of $20.538 billion (+27%, +28% ex-FX). This fell short of estimates.
Advertising Services generated revenue of $9.548 billion (+25%, +30% ex-FX). This beat estimates.
Subscription Services generated revenue of $8.903 billion (+9%, +14% ex-FX). This fell short of estimates.
Physical Stores generated revenue of $4.694 billion (+10%, +10% ex-FX). This was in line with estimates.
"Other" generated revenue of $1.263 billion (+163%, +168% ex-FX). This beat estimates.
Even more than the scattered misses mentioned above, the guidance provided by Amazon is hugely disappointing. This is where last night's selloff came from.
For the current quarter, Amazon sees revenue of $140 billion to $148 billion, which would be growth of 2% to 8%. Wall Street was up around $155 billion on this number. Nuff said. Operating income for the current quarter is expected to land in between $0 (not a misprint) and $4 billion. Wall Street was at a rough $3.5 billion here. Amazon has reasons, namely the slowing macroeconomic environment as well as the stronger dollar. It does not see these negative conditions abating anytime this quarter.
For the full year, Amazon expects to grow capital investments about $5 billion to $60 billion. This will include reductions in spending on transportation and fulfillment and an increase in AWS-related spending just to give you an idea of where Amazon is trying to go.
Amazon ended the period with a net cash balance of $58.662 billion and inventories of $36.647 billion. Cash is down significantly over nine months, while inventories are up moderately. This brings current assets down to $131.463 billion from $161.58 billion over that time frame. Current liabilities add up to $140.363 billion, leaving Amazon with a current ratio of 0.94, and a quick ratio of 0.68. Neither of these ratios is truly acceptable by my usual standards.
Total assets come to $428.362 billion including just $20.168 billion in "goodwill", which is not a problem. I do not see any other intangibles entered. Total liabilities less equity amounts to $290.873 billion. This includes $58.919 billion in long-term debt and $69.332 billion in long-term lease liabilities. Yeah, cash covers long-term debt, but even at a size of this magnitude it is tough to love this balance sheet. No, Amazon is not in trouble, but the balance sheet is not even close to being among the best I've seen.
I have to this point seen eight sell-side analysts that are rated at four or five stars by TopRanks and have opined on AMZN since last night. Every one of those eight rates Amazon as a "buy" or something we consider to be "buy-equivalent." One of the eight didn't set a target price. The average target price across the other seven is $142.43, with a high of $175 (Eric Sheridan of Goldman Sachs) and a low of $125 (Mark Shmulik of Bernstein). Once omitting the high and the low as outliers, the average target price across the other five drops to $139.40.
The fact that the analysts are all "buy" rated is comical. Amazon has flat-out under-performed and plainly told us that it expects to under-perform expectations right on through the holiday season. What's so great about that?
Yes, I told you that I added last night. This was trading, certainly not investing. I intend to continue to trade my way out of Amazon completely. Will I trade the name in the future? If the opportunity is there. Will I invest in a core position? These guys have to prove themselves from here. Amazon has largely and significantly under-performed ever since founder Jeff Bezos took a hike.
Economics (All Times Eastern)
08:30 - Personal Income (Sep): Expecting 0.4% m/m, Last 0.3% m/m.
08:30 - Consumer Spending (Sep): Expecting 0.4% m/m, Last 0.4% m/m.
08:30 - PCE Price Index (Sep): Expecting 6.2% y/y, Last 6.2% y/y.
08:30 - Core PCE Price Index (Sep): Expecting 5.2% y/y, Last 4.9% y/y.
10:00 - U of M Consumer Sentiment (Oct-F): Flashed 59.8.
10:00 - Pending Home Sales (Sep): Expecting -4.6% m/m, Last -2.0% m/m.
13:00 - Baker Hughes Total Rig Count (Weekly): Last 771.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 612.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (SJR) (.37)