Why Today’s Market is Like an Iceberg (It’s Not What You’re Guessing)

Seeing things that are far away is routine for us today. Just grab binoculars — or pull it up on Google Earth. But not too long ago, that luxury didn’t exist…

The earliest known telescope is widely thought to have been invented in 1608 by Dutch eyeglass maker Hans Lippershey – though he was never awarded a patent for his work.

Over the next 150 years, the telescope’s design would be improved by a number of scientist and inventors, including Galileo, who famously applied it to astronomy.

By the late 18th century, hand-held telescopes (also known as spyglasses) were widely available. Though little more than wooden or brass tubes encasing lenses and mirrors, these devices would become an incredibly important tool of the time.

One of the most common uses of the spyglass was aboard naval vessels, where they were used to identify other ships as friend or foe, and spot landmasses or icebergs from great distances.

And while the spyglass no longer has much of a practical use anymore, one aspect from its heyday edures, even to today…

You’ve likely heard the common idiom, “keep an eye out,” but did you know that the saying got its start from the use of the spyglass?

As the user is forced to close one eye to look through the spyglass when searching for potential dangers like enemy ships and icebergs, “keep an eye out” became a common refrain among sailors (and eventually the general public).

When we turn our gaze out over the market, we see two distinct narratives that traders and investors must keep an eye out for.

Let’s take a look…

The Market Turns One Eye to the Fed, While the Other…

While the market mainly focuses on the Fed, it will surely keep one eye on upcoming earnings reports. Because even though the biggest influence on the markets has been monetary policy for more than a decade, the old school fundamentals represented by earnings still matter, and matter quite a bit.

Three months ago, the headlines were trumpeting the expectation of negative year-over-year (YoY) earnings. While the quarter did end with a modest negative outcome, it was significantly better than expected. This improvement over a negative expectation helped to hold up the market through the first part of May, when the renewed U.S./China trade troubles overshadowed all other market inputs.

Now, as we begin the receive results from 2019’s second quarter, the trade troubles have been kicked down the road. Earnings will be important to keep an eye on as a result.

Since I’m on the road for my weekly appearance on Fox Business Network’s Varney & Co. show, I’m going to use some compact language to give you all the market-moving possibilities that might occur this week.

Let’s start with the proverbial 800 pound gorilla… (Where does it sit? Anywhere it wants.) Microsoft (MSFT) is the worlds most valuable company. Monday’s close saw its market cap at $1.064 trillion dollars. That’s trillion with a “T”. It’s the third company to cross that threshold (after Apple (AAPL) and Amazon (AMZN)), and currently the only one holding onto that hallowed ground.

When Microsoft reports after the close on Thursday, look for quality results as the company continues to execute at a high level, especially in the growth of its cloud business. This will confirm its lofty valuation and will allow the rest of the market to ride on the behemoth’s coattails to higher highs.

Likewise, any disappoint from the biggest of the big dogs would send chills through market and cool off our current bullish run.

A much newer tech stalwart reports today. Netflix has won investors’ confidence with its ability to add subscribers to its market-leading total that approached 150 million paid around the globe.

Continued increase in subscribers will help investors and traders overlook the expanding debt burden that the company has taken on to support all that great content. Their cash loss from operations grew by $900 million from 2017 to 2018, while long-term debt grew a whopping $3.681 billion dollars. Investors will certainly be watching what both the cash burn and Q2 debt numbers, especially since the company has committed to becoming cash-flow positive in 2019.

But it’s the new subscriber numbers that will matter the most for this huge company that is still very much a growth story. Net new subscribers are expected to come in at 352,000 domestic and 4.8 million international. Any disappointment vs. these numbers, or reduction in future expectations for subscriber growth will send the stock reeling.

The last important area for the week are the big banks, as a majority of the major players report this week. Citibank (C) announced on Monday morning, and the big news was lower than expected interest margins – but other numbers were mildly better than expected, and the stock has held it’s ground. JPMorgan Chase (JPM) had blowout numbers on Tuesday morning, and despite widely beating both earnings and revenue expectations, lighter than expected revenue from their trading desk had the stock down early Tuesday. Investors came to their senses and bid the stock up later in the morning. Wells Fargo (WFC) disappointed again and got slammed for their efforts. Goldman Sachs (GS) had good earnings and announced a huge growth in dividend payouts. Traders rewarded them with a big up morning. Bank of America (BAC) reports on Wednesday and Morgan Stanley (MS) on Thursday. Whew! The banks that are doing the best jobs are probably JPM, and BAC as a close second. Yet the banking sector hasn’t been getting much love despite good earnings out of the top performers. By Thursday we’ll know if that changes. In this declining interest rate environment, don’t count on a big upward move in the broader sector, even if the numbers are strong. But the early results among banks certainly shows the underlying strength of the broader U.S. econmony.

I’ll be sending some other earnings-specific thoughts and recommendations as the earnings season progresses.

Great trading and God bless you,

 

 

D.R. Barton, Jr.

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