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Execution is critical when investors get high yields in bonds and cash. (0:15) Consumer are feeling the inflation pinch again. (2:31) Will global instability bring buying opportunities? (5:21)
This is an abridged transcript of the podcast.
Our top story so far
As we near the end of the earnings season, investors continue to punish stumbles in results and guidance.
While overall S&P earnings beats have been historically solid, with about 80% topping Wall Street estimates on the bottom line, investors have been quick to pull the trigger on downside surprises and especially caution on the future.
Competition for yield means even less patience for companies that aren’t executing. The S&P dividend yield sits around 1.6%, while investors can get more than 4.5% on a 10-year Treasury bond and north of 5% in money markets.
According to the JPMorgan global markets strategy team, for Q3 earnings, the average price performance relative to the market one day post-earnings has been -0.6% (median performance: -0.4%).
They say: “Overall, earnings beats have been rewarded (average excess performance: +0.4%), though misses punished far more (-3.2%).”
For example, today, the Trade Desk (TTD) plunged after issuing a lighter-than-expected sales forecast for the coming quarter, prompting several Wall Street firms to defend the ad tech company.
Plug Power (PLUG) sank after reporting a larger than expected Q3 loss and below-consensus revenues. It said results have been hurt by “unprecedented supply challenges” in the North American hydrogen market.
Unity Software (U) fell after third-quarter figures missed estimates and the interim chief executive vowed to right the ship. Sales fell short, and Unity also declined to provide guidance for the fourth quarter or the full year as the company seeks to refocus, accelerate revenue growth, and improve profitability metrics.
And shares of Diageo (DEO) sank to a 52-week low as it expects materially weaker performance in Latin America and the Caribbean. The region accounts for nearly 11% of Diageo’s net sales value and is expected to see organic net sales decline by more than 20% year-over-year in the first half of fiscal 2024.
In today’s trading
The broader stock market is making a run for a winning week, but it’s touch and go. The Nasdaq (COMP.IND) has the best shot to end the week in the green and is currently up +0.4%, ahead of the S&P (SP500).
Michigan consumer sentiment fell for the fourth straight month, down to 60.4 for the preliminary November measure. That should have been dovish, but inflation expectations rose, up to 4.4% from 4.2% for the year ahead and 3.2% from 3% for five years.
The inflation figures in Michigan sentiment have been highlighted as something to watch by Fed Chief Jay Powell. And 4.4% is more than double the Fed target, which would imply no cuts in the next year (if consumers were, in fact, in charge).
Pantheon Macro says the most plausible cause of this increase in inflation expectations “is the recent uptick in headline inflation, driven by higher oil prices.”
“If that’s the case, it’s reasonable to expect inflation expectations to drop back as the recent drop in oil prices feeds through to the official inflation numbers.”
“In the meantime, though, the uptick in inflation expectations will be a source of anxiety for the Fed, given lingering fears that the downturn in inflation could stall.”
The 10-year Treasury yield (US10Y) pared some losses after the consumer confidence figures, but it is now back fighting the 4.6% level. It surged yesterday after a disastrous 30-year auction that priced more than 5 basis points above the when-issued yield, which is known as tailing.
ING says a tail that big could not be ignored, and the deterioration in Treasury’s liquidity is worth noting and is worrying.
Allianz Adviser Mohamed El-Erian noted the “crazy volatility in US Treasuries” is “problematic for the functioning of a broad range of markets, resource allocation throughout the economy, and the standing of the US in global finance.”
In other news of note
Morgan Stanley started coverage on three semiconductor firms: Arm Holdings (ARM), Synopsys (SNPS), and Cadence Design Systems (CDNS), noting that AI is increasingly playing a role for all three companies.
Analyst Lee Simpson started Arm at Equal-Weight rating, noting its current valuation looks “fair.” Cadence also got an EW based on “recent share price strength.” And Synopsis snagged an Overweight due to “product diversification, market leadership, and new market opportunities as sources of upside surprise.”
Meanwhile, Bloomberg says Chinese artificial-intelligence startup 01.AI bought enough of Nvidia’s (NVDA) chips earlier this year to last for the next 18 months. That was before the U.S. brought in stricter export curbs for the sale of chips and chip tools to China.
Nvidia’s graphics processing units, or GPUs, are considered to be the most advanced for training AI models, such as OpenAI’s GPT4.
For income investors
Seeking Alpha’s Dividend Roundup highlights payouts from HP (HPQ) and Devon Energy (DVN) as well as declarations from companies like Waste Management (NYSE:WM) and Valero (VLO).
Looking to next week, Exxon Mobil (XOM) and Kroger (KR) will see the ex-dividend dates for their upcoming dividend payments.
And wrapping up the week in the Wall Street Research Corner
Geopolitical risks are creating a buying opportunity for stocks, according to Greenlight Capital’s latest letter to its investors.
David Einhorn’s Greenlight says global tensions will lead to lower stock prices.
“We intend to be positioned to buy beaten-down stocks and some truly distressed debt, should the opportunity present itself.”
Greenlight Capital holds long positions in Brighthouse Financial (BHF), CONSOL Energy (CEIX), Green Brick Partners (GRBK), Hyndryl Holdings (KD), and Vitesco Technologies (OTCPK:VTSCY).
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