Intel, American Express Report Strong Quarters, Helping Set Positive Early Tone

Another batch of solid earnings reports—including a monster performance from chipmaker Intel (INTC)—could combine with retreating fears of the coronavirus to set a positive tone early Friday.

Today’s action could determine whether the S&P 500 Index (SPX) ends up rising or falling for the week. It ended Thursday down about four points from where it closed last Friday. It’s been three weeks since the SPX had a losing week. Nasdaq (COMP) is up so far this week, while the Dow Jones Industrial Average ($DJI), burdened mainly by Boeing Co BA, is down nearly 200 points.

Focus this morning is probably going to be on INTC and American Express Company AXP, the latest big names to turn in their earnings report cards. Both companies’ shares rose in pre-market trading as investors apparently liked what they saw.

It’s kind of hard to find anything that’s not awesome with INTC’s earnings. People were a little nervous going in because Texas Instruments Incorporated TXN got a lukewarm reception, but INTC absolutely crushed it.  Earnings and revenue surpassed Wall Street’s estimates and the company also delivered enthusiastic guidance and raised its dividend. One key metric—data center revenue—rose 19%. Shares climbed more than 4% before the opening bell.

If there’s any complaint at all about INTC, it’s that they didn’t sound quite as bullish about the second half of the year. But that’s relatively minor compared with everything else. The INTC earnings follow what really looked like a decent overall outing from TXN, so we’ll see if the chip sector continues its rally. Remember, the chips helped set the positive tone over the last three months or so.

AXP shares rose 2% after the company also beat analysts’ revenue and earnings forecasts, but just barely on both. Like all of the payment companies, AXP is arguably worth tracking for what it can tell you about consumer spending. In the case of AXP, card fee revenue growth of 17% in the quarter could speak to rising consumer demand for credit. Also, keep in mind that people who use AXP’s products tend to be more in the upper end of the income range, so the company’s performance could reflect how wealthy people are spending.

Treading Water

Thursday was the second day in a row where the SPX shook off fears of the coronavirus to inch higher by the end of the session. Lack of an emergency declaration from the World Health Organization (WHO) might have stirred up a little vigor by the end of the session.

Don’t be surprised, however, if more news about the virus—either good or bad—has an impact on the market at some point today. People seem pretty worried about its possible effect on travel and spending in Asia ahead of the Lunar New Year holiday this weekend, and Walt Disney Co DIS closed its Shanghai theme park over the holiday in response to the outbreak. It’s unclear when it will reopen, and DIS shares fell slightly before the opening bell.

Both the COMP and Russell 2000 (RUT) outpaced the SPX on Thursday, with COMP hitting record highs, but $DJI finished lower. None of the gains or losses were substantial, which means the market remains in the same holding pattern it’s been in most of the last week.

In the event of a pullback, technical support for the SPX might be in a range of between 3212–3238, said research firm CFRA. Meanwhile, the RUT recently retreated from a resistance area between 1704–1723. Support is between 1645–1669, CFRA said. 

Earnings slow down a bit later today and Monday, but analysts haven’t seen enough positive surprises yet to change their views of a likely 2% drop in Q4 earnings for the S&P 500. FactSet generally updates its earnings estimates each Friday, so consider looking for that today.

Comcast Corporation CMCSA shares slid 3% yesterday after the company appeared to disappoint investors with some of its quarterly numbers. The company added 442,000 high-speed internet customers, but lost 149,000 pay-TV customers. Costs rose significantly. Also, the pay-TV customer loss was higher than expected and the company, in its call, didn’t paint a positive picture on that front. It sounds like they expect the subscriber losses to continue. 

In contrast, Netflix Inc. NFLX had a huge day Thursday, with analysts attributing some of its 7% gains to CMCSA’s troubles. Positive comments from analysts following the company’s earnings earlier this week also appeared to drive some of the animal spirits, with many cheering NFLX’s progress growing its international customer base. 

The same “cord cutting” that might have hurt CMCSA is probably helping streaming companies like NFLX. However, DIS shares took a hit Thursday. The stock had a great run going into the launch of Disney+, but seems to have lost some of its magic since then. Maybe the Disney+ excitement got a little ahead of itself. 

Crude Cracked

Another stock that’s hurting right now is Exxon Mobil Corporation XOM, which fell again Thursday and is down 20% from its 52-week high. Crude oil really got taken out to the woodshed Thursday, and that’s probably a big reason for XOM’s struggles. The company relies heavily on oil and natural gas for revenue, and both are sinking. Crude is hanging around near the $55 a barrel mark this morning, at nearly two-month lows. It’s had a brutal week and is down for the fourth consecutive day.

As long as we’re talking transportation, it’s worth riding the rails to get a look at earnings yesterday from Union Pacific Corporation UNP. Despite missing the Street’s earnings estimate, the company’s shares rose in part because it looks like management is doing a good job reining in costs. Railroads, including UNP, have been victims of the weak U.S. manufacturing and energy environment lately, but UNP stock is near all-time highs as investors seem impressed at the company’s ability to get more efficient in its business.

The 10-year Treasury yield fell to 1.73% yesterday, near the low for its recent range, and any drop below 1.7% might raise some eyebrows. It’s still holding at 1.73% this morning. 

Lower yields typically mean less investor faith in the economy, and the yield curve grew slightly flatter yesterday with two-year yields up one basis point vs. a three-basis point drop for 10-year yields. Typically a steeper curve is seen as more bullish and might help banks achieve better profits.

As far as the economy is concerned, there’s no major data today, but next week brings the government’s first estimate of Q4 gross domestic product (GDP). The Atlanta Fed’s GDP Now meter pegs Q4 growth at 1.8%, down from 2.1% in Q3.

Looking beyond the U.S., the European Central Bank (ECB) yesterday held rates unchanged in a decision that matched analyst expectations.

CHART OF THE DAY:  TWENTY YEARS TO NOWHERE: Over the last 20 years, as this chart shows, natural gas (/NG—candlestick) has actually lost more than 20% of its value, though not without plenty of peaks and valleys along the way. Crude (/CL—purple line) has climbed more than 100%, but that’s not too impressive, either, if you consider gains in the stock market since January 2000. Data Source: CME Group.  Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Rate Hike? Probably Not: In an odd twist, futures prices project a nearly 13% chance of the Fed hiking rates at its meeting next week. Now, let’s keep that in perspective, because any time the market shows an 87% chance of no rate change this close to a meeting, it tends to be right. Still, consider how the market might react if the Fed does decide to surprise nearly everyone by tightening. It’s really tough to see that happening when you look at how muted inflation is right now and without any type of potentially scary data that might move the Fed’s hand.

Instead, a lot of talk at the Davos economic meeting this week was about the impact of negative rates. JPMorgan Chase & Co JPM CEO Jamie Dimon went as far as saying negative rates are one of the few things that give him “trepidation” at this point, media reports said. Dimon added that the negative rate policies in Europe and Japan are “one of the great experiments of all time, and we still don’t know what the ultimate outcome is.” The Fed itself has said time after time it doesn’t see the need for negative rates here. It’s also unlikely to see the need for a hike next week, barring some dramatic event between now and then.

Expect More Tesla Volatility: Tesla Inc’s TSLA batteries seem fully charged lately, at least from a stock market perspective. The high-flier’s shares have doubled since the company’s last earnings report. TSLA recently passed Volkswagen for the world’s number-two car company from a market-cap standpoint, and is breathing down the neck of Toyota, according to Barron’s. This is even though both those companies sell 50 times as many cars as TSLA.

Yes, TSLA CEO Elon Musk has arguably revolutionized the auto industry, but keep it all in perspective. This is becoming one of those things where it’s almost a market unto itself. The options market sees it as very volatile. It’s an interesting name, but if you play in there you’re playing with fire and need to have a big range.

Cheap Gas, Anyone? If there’s a 180-degree opposite of TSLA in today’s markets, natural gas (/NG) comes to mind. Front-month futures recently fell below $2 per million British thermal units (BTU) for the first time since 2016. Huge supplies from fracking, along with a mostly warm U.S. winter (so far) plague that market. It’s actually kind of ironic to see natural gas values sinking here, considering the fuel is out-competing coal in the U.S. and giving some rail companies tough competition. When a commodity enjoys strong demand, you’d think the price would go up. 

However, with the U.S. pumping a record 13 million barrels of oil a day, drillers are turning out more natural gas than the market seems to need. A lot of it actually is allowed to simply flare off because there’s no value. At the current price of $1.88, natural gas is still a bit above the 2016 low of $1.61, but far cheaper than it was back in January 2000, at the very start of this century. It traded at around $2.74 then just before a monstrous half-decade rally that took it all the way to a peak of nearly $16 in late 2005 after Hurricane Katrina. It seems hard to imagine prices like that now.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy.

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