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Market Lab Report - Premarket Pulse 7/30/18

2018 has been a tough year for the markets. Despite the Federal Reserve's ongoing quantitative tightening, or QT, such has been offset by Trump's own form of money printing which naturally boosts US government debt. Spending currently more than offsets the Fed's QT. The net effect is to try to boost the economy and stock market.

Trump deficit spending is inflationary and thus helps boost those assets tied to inflation such as stocks and housing. The allegedly "strong" second-quarter advance GDP number of 4.1% belied the action of major stocks and leading indices. As discussed, CPI numbers have been distorted over the years thus are not an accurate representation of inflation. This, in turn, negatively affects GDP numbers. 

Over in stocks, of the FAANG stocks, first Netflix then Facebook disappointed investors with sluggish earnings reports.

While Facebook beat earnings, they fell short on revenues. When it comes to earnings beats, the market has been expecting perfection. Quantitative easing has helped to inflate company earnings through stock buybacks, thus record numbers of companies are beating estimates. So even though FB's sales numbers missed by a relatively small amount, this expected perfection accounted for the initial 10% drop in price just after they reported earnings. The deeper 24% premarket drop in the price of FB stock that followed when it traded as low as 164.3 was due to the company's CFO saying shareholders can expect "revenue growth rates to decline by high single-digit percentages from prior quarters" for the third and fourth quarter. The CFO also said the company expects margin compression, with operating margins trending toward the "mid-30s on a percentage basis," compared with second-quarter operating margins of 44 percent due to investments in news products and capital expenditures related to safety and security that total "billions of dollars." 

This safety and security issue is very real with widespread implications to a number of leading technology companies that support many users. The substantial correction in the price of FB in March earlier this year was due to the company's Cambridge Analytica privacy scandal. The European Union's recently enacted General Data Protection Regulation, a set of rules that give users more control over their online data, is also indicative of the seriousness of the matter.

NFLX meanwhile has managed to settle down and may find a floor despite its subscriber growth figures falling short on July 17. Netflix’s share price dropped 14% in after hours trading, after the company’s subscriber-growth figures fell well short of analyst expectations. The figures fell short by nearly 50%, or nearly half as many new subs in the U.S. in the second quarter as had been anticipated, and its international subscriber base grew by 4.5 million, versus the estimate of 5.1 million. Nevertheless, NFLX remains the dominant player in its space and has become one of the new alt-currencies in terms of institutional funds that must keep pace with the markets. So while global QE remains at near record levels, the capital finds its way into the tallest standing midget which is the US market as well as the tallest standing stocks which include the FAANG names.

Countering these misses is Alphabet (GOOGL) which jumped 4.9% in Tuesday morning trading after reporting revenue of $26.24 billion, up from $20.91 billion in the second quarter of 2017 and higher than the average analyst estimate of $25.58 billion. Google produces almost all of Alphabet’s revenue, with the lion’s share of that from its advertising business.

Also countering is AMZN's earnings report which gapped up a couple percent higher after hours after the company reported its largest quarterly profit total in history, disclosing earnings per share more than double what analysts expected. Its second-quarter net income came in at $2.5 billion, or $5.07 a share, up from earnings of 40 cents a share a year ago and the first time Amazon has reported more than $2 billion in quarterly profit. Amazon reported revenue of $52.9 billion, up from $37.96 billion a year ago but slightly lower than analyst estimates. Analysts on average were expecting earnings of $2.48 a share on sales of $53.37 billion, so while earnings trounced, sales had a mild miss. 

AAPL's earnings report is due this coming week on Tuesday July 31 after the close.

FAANG stocks now account for 27% of the NASDAQ Composite thus represent a sizeable chunk of the new alt-currencies.

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