Enjoy your January 30th hand-crafted Brew!
QUOTE OF THE DAY
“Greece cannot be expected to grow out of its debt problem, even with full implementation of reforms…its debt is highly unsustainable” — The International Monetary Fund’s honest opinion on Greece isn’t easy to hear. Ticking time bomb, anyone?
- U.S. markets finished mixed on Friday as companies continued reporting earnings. Meanwhile, investors reacted to president Trump moving to cut regulations, which led to miners and manufacturers leading indexes higher for the week
U.S. GDP Heads South
…The first estimate for Q4 2016 GDP is in, and it’s not pretty. The magic number: the U.S. economy grew at a 1.9% annual rate to close the year, a big bummer compared to Q3’s speedy 3.5%. This leaves the U.S. economy on the lackluster track of 1.6% growth for 2016, a disappointment compared to expectations of 2.2% growth—and the weakest performance for GDP since 2011. So what’s behind the trouble? First, a strong dollar hit company profits hard—remember, a strong dollar means U.S. exports cost more for global customers, putting U.S. companies at a disadvantage on the international stage. Throw cheap oil into the mix and it makes sense that GDP came in flat. But don’t be too discouraged. With the U.S. labor market in full swing and consumer spending looking optimistic, the economy is still chugging right along towards recovery.
We’re Not Sure Who Looked Worse
…Chevron (-2.37%) or the analysts who forecasted its earnings. Over the weekend, the oil giant posted earnings that were nearly 70% below consensus estimates. Talk about a swing and a miss. Not all oil companies have been pleased with rising oil prices lately, especially since the rising costs of turning oil into fuel have chipped away at their margins (this is the “downstream” part of the oil business). How bad we talkin’? Chevron barely broke even on its entire downstream segment. Desperate times call for desperate measures—CEO John Watson engaged in a cost-cutting program that trimmed $14 billion in fat through 2016, but unfortunately it still came up short. Better luck next time, Chevron.
Only a Few Billion Short
…Of last year’s report. With the release of American Airlines’ (-5.32%) Q4 earnings report, it’s pretty clear that it could use another $3 billion tax benefit like it had last year—but hey, that’s why they call it a one-time benefit. That’s right, the airline’s earnings dropped 91% from the year before, which just happened to be utterly record-shattering. If that’s not enough, American Airlines’ pre-tax income also fell last year and operating expenses surged up almost 6%. So is it time to grab a parachute and hop out? Not quite. Even though American Airlines missed Wall Street’s expectations, it still has the newest fleet relative to its competition and was named Airline of the Year by Air Transport World. Good luck in 2017, American.
Snap Me, NYSE
…Snap to release its financials this week as it prepares for its long-awaited IPO. Everyone’s itching for some details about the soon-to-be-public social media giant. Here’s what we have so far: Snap could be valued at up to $25 billion, and it’s expected to offer “no-vote” shares in its offering. Long story short, it means that management will still call the shots about the company’s decisions, not the investors. A $25 billion valuation doesn’t come easy, though—Snap has been working hard to secure large ad-spending commitments ($100-$200 million) from advertising giants like WPP and Omnicon, a necessary step as the Ghost Giant pitches itself as the next big Google/Facebook competitor in digital advertising. Godspeed, Snap.
- Two men charged in alleged Ponzi scheme for ‘Hamilton’ tickets
- Tesla sues former employee for stealing Autopilot information
- Google Maps will now tell you how bad the parking is at your destination
- MailChimp goes beyond email marketing, launches support for Facebook ad campaigns
- Monday: Personal Income and Outlays
- Tuesday: Apple, Exxon Mobil, Pfizer, MasterCard, UPS, Sprint, Under Armour Earnings; Consumer Confidence
- Wednesday: Facebook, Altria, MetLife Earnings; ISM Manufacturing Index; Fed Meeting Announcement; Auto Sales; Private Employment Report;
- Thursday: Amazon, Visa, Philip Morris, Deutsche Bank, Ferrari, Chipotle Earnings; Weekly Jobless Claims
- Friday: Honda, Hershey Earnings; January Jobs Report
Wall Street Analysts Have Buy Fever
And it’s not for good reason. According to analysis from CNBC and the WSJ, Wall Street research analysts are extremely likely to rate the stocks they cover as “buys.” So, the next time you look up a stock you’re interested in and you see that all the analysts are rating it as a “buy,” take it with a grain of salt. Brokers and analysts are often pressured into these optimistic ratings if they want to keep a good relationship with the companies they cover. Here are the alarming numbers:
- FactSet collected data on 11,000 ratings of S&P 500 stocks, and only 6% of the ratings were “sell.” That’s the highest percentage of “sell” ratings since the recession.
- Despite a slight bump during the recession, a high percentage of “buy” ratings seems to be marketproof. Since 1998, the proportion of “sell” ratings in the S&P 500 has stayed below 10%.
- Not all brokers are equally optimistic. Morgan Stanley and Bank of America each issue “sell” ratings 16% of the time, compared to Deutsche Bank and Wells Fargo, which issue “sells” only 2% of the time.
- So why the onslaught of optimism? Analysts make these positive recommendations in order to get access to corporate executives, but there’s an obvious tradeoff in terms of credibility. According to a study by the Journal of Accounting Economics, when brokers that issue fewer buy ratings upgrade a stock to buy, that stock vastly outperforms the rating upgrades from brokers with more buy ratings.
Interview Question of the Day
What’s the trade balance between the U.S. and Mexico? How will a border tax affect this? (Answer)
Business Term of the Day
Businesses like Uber and Airbnb have come a long way since their inception thanks to Travis’ Law. Travis’ Law states that if one’s product is “so superior to the status quo and if people are given the opportunity to try it, they will defend it and demand its right to exist.” Why is Travis’ Law important? It allowed companies like Uber to bend current laws in order to expand their outreach. An example of this would be Uber’s battles with city councils to compete with long-standing taxi companies.
Food for Thought
Since the Super Bowl is this weekend, let’s talk about the relationship between the outcome of the big game and this year’s market performance. Apparently, the indicator dubbed “Super Bowl Predictor” worked for seven straight years up until 2016, a year that defied sports history and statistics. The predictor states that if an original NFL team (i.e. a team that existed when the NFL began) wins the Super Bowl, the Dow will rise over the next year; otherwise, it will fall. So bulls, hope that the Atlanta Falcons win so the market can build on the Dow 20,000.