WASHINGTON. Beginning Monday, January 28, traders and investors face the launch of the latest quarterly 2018 earnings season reports. These reports always create an issue for companies that don’t meet or beat earnings estimates. When that happens, investors tend to massacre their shares, even if they only miss numbers by a penny or so. Monday’s designated corporate earnings report victims are Caterpillar and Nvidia.
So much will happen in the US stock market in the week ahead that gaming the action may prove unusually daunting.
Also hanging over markets: the ongoing China Syndrome the ridiculous Federal government shutdown game… Well, you name it and if it’s bad, it’s happening. Or looming.
In addition to the above horror shows, we also face the ongoing Congressional Carnival of Cretins and the Federal Reserve balance sheet idiocy. Then there’s Venezuela, the never-ending Brexit farce, plus the latest exciting Trump impeachment rumors. (Yawn.)
And, oh, yeah, we have options expiration coming this Friday.
Caterpillar reports miserable earnings, gets banished to the underworld
As just noted, the current earnings season parade got off to a rough start right on time Monday morning. Caterpillar (trading symbol: CAT) – a major, old-style Dow industrial stock – dropped 8.3 percent after reporting weaker-than-expected earnings for the fourth quarter, according to CNBC. The network also noted that much of the problem was due to, you guessed it, China.
“The company said its sales in the Asia/Pacific region declined because of lower demand in China. Caterpillar is considered a bellwether for global trade given the company’s exposure to overseas markets. The company also issued disappointing guidance.”
“Guidance,” the Holy Grail for stock analysts, is a company’s crystal ball vision of its expected fiscal year earnings. “Disappointing guidance” is a dog-whistle for analysts to cut estimates and issue either “sell” or equally dreaded “hold” recommendations. (Because they pretty much mean “sell,” too.) Look out, below, Caterpillar shareholders!
Nvidia follows CAT into the Earnings Temple of Doom
In addition to Caterpillar, CNBC highlighted another bellwether stock. This one is (or was) a superstar in the tech sector. But that company’s current earnings and guidance numbers also went off the cliff.
“Nvidia [NVDA], meanwhile, dropped 13.7 percent after slashing its fourth-quarter revenue guidance to $2.2 billion from $2.7 billion. The chipmaker said “deteriorating macroeconomic conditions, particularly in China,” impacted demand for its graphics processing units.”
We noted several columns ago that Nvidia, noted for its graphics processors and cards, suddenly became a victim of a user base most lay investors, including this one, never knew about.
A losing game for Nvidia hardware
It turns out that the company’s chips and related assemblies, beloved of computer gamers, proved popular among that wacky cadre of cyber-currency miners. They employ Nvidia chips and cards that game as well. But when cyber-currencies began to tank big-time last year, these virtual “miners,” having already bailed out of what was left of their bank accounts also bailed out of their Nvidia products. At which point they began dumping Nvidia hardware, offering these products for sale – cheap – on the secondary market.
The volume of used cards was apparently so substantial that it’s been killing Nvidia’s sales of new products: classic supply and demand. I can’t recall ever seeing anything like this before in the tech market. At any rate, this clobbered Nvidia’s numbers and the stock has been paying the price.
Nvidia is a great company and its numbers should begin to recover… whenever. So if tech investors can catch a bottom in this stock, their patience should earn them a handsome reward. But, in this kind of yo-yo market, each day becomes an unpredictable adventure. So the real challenge for Nvidia fans is to determine just where the bottom in this stock becomes obvious.
Bye-bye buybacks. At least for now.
Another variable in current trading action: the current buyback window is about to close for a period of time. This means that companies buying back their shares on the open market – all the rage since the Great Recession as a way of boosting earnings per share numbers – will temporarily disappear from the trading floor. Along with all those big “buy” orders. As those “buy” orders disappear, the bears may reign supreme, creating, if temporarily, a vicious seller’s market.
The Good, the Bad and the Ugly
CNBC helpfully explains this strange phenomenon.
“The coming week will not only be the heaviest in terms of number of S&P500 companies reporting Q4 earnings, it will also see the peak of the current buyback blackout window. As JPMorgan shows in the chart below, in the week of Jan 29, roughly 60% of all companies will be prohibited from repurchasing their stock, a potential downside risk as should a negative catalyst emerge – say US-China Trade talks fail to impress – there will be far fewer companies able to provide a natural shock absorber to a rapid drop.”
“That’s the bad news. The good news is that one the blackout period is over, and starting next week, only a third of the S&P will be prevented from repurchasing stock, companies will be able to return to doing what they have done best in the past decade – buyback their own stocks, reducing their shares outstanding, and artificially boosting their EPS, stock price and equity-linked management compensation.”
In other words, the Lord giveth and the Lord taketh away. Or are we allowed to use that analogy in the current anti-Christian environment?
Latest Monday numbers
As of 1:30 pm ET, we watch as the Dow attempts to recover somewhat from its initial plunge. The Dow Industrials currently stand at 24445 and change, off an unpleasant 1.14 percent on the day. Caterpillar’s negative numbers didn’t help.
The broader based S&P 500 finds itself off roughly 30 points at 2634, a 1.11 loss on the day thus far. And the tech-heavy NASDAQ wobbles around 7065, down close to a whopping 100 points for a 1.4 percent battering, heavily influenced by Nvidia.
Who knows where things will end at Monday’s 4 p.m. closing bell.
Bottom line: Hang onto your seats. No one knows which way this market will go. Likely, it will travel in both directions with an endpoint ending up who knows where?
— Headline image: Today’s trading action: Yo-yo market or Zombie Apocalypse? Take your pick.
(PR image, Zombie yo-yo)