David Ross

What I think I learned last week #40

Contrarians take note: Hedge funds are defensive and active managers in the US and Europe have cut their equity holdings.

The International Monetary Fund was busy with warnings. They warned that parts of the Eurozone banking system remain vulnerable. They then warned that Trump’s tariffs could cut global growth by 50 basis points over the next two years.

Swimming against the tide of protectionism, Japan and noted US foe, the European Union, signed a bilateral free trade pact that covers about one-third of global GDP. The “cars for cheese” deal reduces tariffs on Japanese cars while Japan opens up its market to European wine and cheese. It all sounds gouda to me.

Fed Chairman Jay Powell, however, was confident in his prepared remarks to the US Senate about the US economy and played down risks from trade conflicts. He also stated that it was best to keep gradually raising interest rates as the labor market continues to strengthen. He later argued against protectionism and said that Europe was not a “foe.”

His boss, Donald Trump, did not like this, saying he is not thrilled about interest rate hikes. And just to prove that he still considers Europe to be a foe, Trump called out China and the EU as currency manipulators.

The International Energy Agency said combined investment in renewable power generation and energy efficiency fell last year and is expected to drop again in 2018, threatening climate policy targets.

Private equity funds are raising money at the fastest rate in twelve years. Too much money chasing too few deals equals low future returns.

Singapore’s June exports grew only 1.1%, far short of the expected 7.6% expected and May’s 15.5% rate as trade war concerns and slowing electronics exports affected results.

Larry Fink, CEO of Blackrock, the world’s largest asset manager, said that trade wars could cause stocks to drop 10% to 15%.

Auto sales in Western Europe rose 5.1% in June, reaching their highest level ever in the EU.

Not to be outdone, US consumers continued spending as June retail sales were up 0.5% and May’s number was revised up from 0.8% to 1.3%.

The company formerly known as Google and now ridiculously called Alphabet was hit with a €4.3 billion fine from the European Commission. That’s the equivalent of 14 days of work for Google. I think they will survive.

President Trump did not like the fine either, tweeting “I told you so! The European Union just slapped a Five Billion Dollar fine on one of our great companies, Google. They truly have taken advantage of the U.S., but not for long!”

Amazon’s Prime Day started slowly as its website failed in the US at the start of the sales event.

Amazon’s retail and cloud computing competitors, Walmart and Microsoft, entered into a strategic partnership on the usage of cloud and artificial intelligence technology.

Apparently feeling mighty with its new Microsoft-provided technological capabilities, it has been reported that Walmart is looking to provide its own streaming service to challenge Netflix and Amazon. I can only imagine the content they are looking to create. Maybe “A Day in the Life of a Walmart Greeter,” a series about meeting the challenges of saying hello or “How to Stack It High and Price it Low,” a comedy about an inept employee who reverses the saying and ends up stacking it low and pricing it high!

Earnings were center stage last week. Of the S&P 500 companies that have reported so far in this earnings season, 87% have had beaten earnings estimates and 77% have beaten revenue growth expectations. Here are some of the earnings reports that I found interesting:

– Netflix shares plummetedon lower-than-expected subscriber growth. In fact, I thought Netflix was a defense contractor because every headline mentioned Netflix tanks.
– IBM did better than expected, marking its third consecutive quarter of revenue growth after five years of year-over-year revenue declines.
– Microsoft was mega-strong with revenue growth of 17%with its Azure cloud business growing 89%.
– Bank of America shares jumped4% on strong earnings.
– Deutsche Bank stock screamed ahead as it announced preliminary quarterly results well aheadof what was expected. Its profits were so far ahead of projections that it announced the results nine days ahead of schedule.
– Goldman Sachs saw profits rise 44%on 14% better revenues.
– Morgan Stanley profits were up 39%on a revenue increase of 12%.
– German software giant SAP saw its shares under pressure despite beating forecastsand raising its guidance on cloud growth because of weakness in its legacy software business.
– French retailer Casino saw its shares jump on accelerating sales growth of 5.2%in the quarter.
– Consumer goods giant Unilever sales of 2.7% were lower than the expected0%.
– eBay’s stock slid after lowering its full year sales outlookand missing revenue expectations.
– It was a bad week for advertisers. Omnicom shares fell the most in nine yearson weaker-than-expected revenue growth of 2% while Publicis, the world’s third largest advertising group fell by as much as 9% after an unexpected decline in revenues of 2%.
– The world’s largest healthcare group, Johnson & Johnson, had earnings that beat expectations. Revenues of $20.8 billion also beat estimates of $20.4 million.
– US industrial conglomerate Honeywell posted strong growth and raised its full year salesand earnings guidance for the third time this year.
– However, US industrial conglomerate General Electric did not fare as well as it cut its cash flow targetfor the year.
– America’s largest aluminum producer, Alcoa, cut its earnings guidance for the year due to tariffs and rising energy costs. Despite actually posting a big earnings beat for the quarter, the guidance was enough to cause its stock to drop 12%.

Finally, in Jordan, researchers found the world’s oldest bread, baked about 14,500 years ago. They said while it was as hard as a typical French baguette, it did taste better.

And that’s what I think I learned last week.