Earnings Announcements Kick Off

Jan 18, 2019   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

After a tumultuous end to 2018, investors are back with an appetite for equities.  A good portion of last year’s sell-off has now been recovered in the first couple weeks of the year as hopes for a détente between the U.S. and China take hold.  Having said that, the ongoing government shutdown will be an issue for the economy both now and potentially in the future.  The downside is, we won’t know since the agencies tasked with putting out economic data are currently furloughed.  Quite literally, the economic data investors and politicians depend on for both policy and investment decisions is missing in action.

This week started fourth quarter earnings announcements.  For the most part, this week was about the financial sector and a surprisingly large number of banks reported within days of each other.  If I didn’t know better, I might think this was intentional.  The takeaway is that banks’ balance sheets remain strong, credit quality has not deteriorated, and loan write-offs have not picked up.  Many of those reporting this week saw nice gains.

On the other hand, the economic data, that is making its way out, is a bit mixed.  Consumer sentiment is down which shouldn’t come as much of a surprise given the government shutdown.  But more importantly, European data suggests Europe is weakening.  Germany’s growth has slowed to a five-year low after reporting dismal industrial production figures last week.  There are indications that a global slowdown is afoot.

As for company news, we hit the mother lode this week.  There was so much I think the best way to summarize it is with bullet points:

  • Volkswagen announced it is building a new EV (electric vehicle) plant in Tennessee. Ford announced it is planning a fully electric version of its F-150 pickup truck.  And Toyota executives were quoted as saying they believe the EV market is being overbuilt and that demand will lag the huge buildup in supply in coming years.
  • PG&E filed for bankruptcy, disclosing the substantial liability it faces after the fires it inadvertently started in California. A judge this week ruled that the company is in fact at fault in creating the fires.  To put thing in perspective, PG&E is California’s largest utility provider.  Considering how large California is relative to most states, this is a monumental problem.
  • Netflix decided to raise its monthly subscription price for the third time in as many years. While the price increase is nominal at approximately $2 per month (depending on tier), it highlights the increasing costs of producing a large amount of content.  The company had $4.9 billion in debt as of Sept. 2017, $8.3 billion as of Sept. 2018, and $12 billion just three months later.
  • Tesla announced it plans on reducing its workforce by 7% in coming months. Much like Netflix, it has a debt “issue” which is looming.  It has a bond in the amount of $920 million coming due in March.  The catch is, if the stock price is above $359 at the time it matures, the company can convert the debt into equity thereby avoiding a cash crunch.  Today’s move suggests the company is feverishly trying to cut expenses with the hope of pushing the stock price above this threshold or at the least, have the cash on hand to settle the bond at maturity.
  • The judge overseeing the Sears bankruptcy awarded the liquidation to ESL Holdings, which just happens to be ex-CEO Eddie Lampert’s holding company. While the media heralded the last-minute proposal as having tremendous benefit to both the company and its employees, I’m less sanguine.  Lampert has a long history of taking advantage of the Sears corporation for personal benefit.  The cynical part of me believes this is a play for the property and it won’t be the last time we hear about Sears closing for good.
  • Lastly, Amazon announced it now has more than 100 million subscribers to its Amazon Prime service. Is there anything that can stop this company?

In closing, I leave you with a sobering statistic.  A recent study revealed that one in five millennials (those age 18 to 34) expect to die without ever having paid off their debt.  The average millennial has about $32,000 in personal debt, excluding home mortgages.  Apparently, that debt is both crushing and endless.  Just over 60% of millennials with debt don’t know when, or if, they’ll ever be able to pay off what they owe.  That includes roughly 42% of millennials who don’t know when they’ll be able to wipe out their debt, and almost 20% of those who expect to die in debt.  Along the same lines, it was reported this week that debt is the primary reason homeownership is down among this demographic.  It may be easy to vilify young adults these days, suggesting they are lazy, lack ambition, and are too complacent.  But they do face headwinds in their lives and careers that prior generations may not have experienced.  It’s worth thinking and maybe even talking about.

January 18, 2019

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