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TGIF – Crazy Week Grinds to a Halt, Earnings Season Begins


That's the expected earnings gains for S&P 500 companies this quarter compared to the same quarter last year.  Most of that is due to the tax cuts and the rest is due to buybacks as there are now no longer $2 TRILLION worth of shares to divide the earnings among due to buybacks and M&A (which earases the shares completely while putting the earnings into another company).  

As you can see from the chart on the right (only through June), buybacks have been heavily oriented to the tech sector, as has M&A activity so it's no surprise the Nasdaq is plowing higher despite the actual companies not actually making more revenues or even more profits – it's just the same profits divided by a lot less shares.  

Still, it's real.  As an investor, if I buy a stock that makes $1Bn on 1Bn shares then I'm making $1 per share and I'll pay $20 ($20Bn) at 20x earnings but, if the company takes $4Bn and buys back 200M shares (20%) then the same $1Bn in profits becomes $1.25/share and 20x becomes $25/share – on the same revenues and the same profits.  So, for a CEO who gets paid based on stock performance, it makes sense to do share buybacks whenever possible and the $2.5Tn of offshore funds that have been "repatriated" from overseas (from where they were hidden to avoid paying taxes and are now being rewarded for their behavior) have gone almost entirely to this practice.  

Image result for stock buybacks debt 2018As I was saying, as an investor, you are getting your $25 worth from an earnings perspective as it's still 20x earnings but, consider that last year, this company had $4Bn in cash on the $20Bn valuation (or cash and no debt) and now it does not.  Wasn't the OPPORTUNITY to use that $4Bn to grow the business part of what made the company worth 20x earnings in the first place?  Now that opportunity is lost and the company is what it is at $25/share with MUCH LESS possibility of growth down the road as it WASTED 25% of it's market cap buying back it's own stock!

We're not building things anymore – the only kind of engineering US companies do these days is financial engineering and, while 25% earnings (per share) growth may appear to make them strong – it really has made them very, very weak and put them in a massive amount of debt as companies used to do things with their cash like build factories and hire workers and invent new products or even just pay down debt but now they buy their own stock to prop up the prices and make it look like they are making more money and it's all just a grand illusion.  

CitiGroup (C) is reporting earnings today and they made $1.63 per share vs $1.28 per share they made last year but they also spent $2.2Bn buying back 33M shares of their own stock in this quarter alone, calling it "capital returned to shareholders", which is true if you SOLD C stock during the Q but, if you were the sucker buying it – then you bought it with $2.2Bn less dollars at top prices.  

Now, here's where things get crazy because C made $3.872Bn last year in Q2 and this year they made $4.5Bn, which is 16.2% more (thanks to tax breaks) but $1.63 is 0.35 more than $1.28 or 27.3% more – that's the magic of buybacks!  They've also run their total debt up from $380Bn to $414Bn so $31Bn more debt used to buy all those shares back as well – isn't that special?  

Meanwhile, in July of last year, C was at $65/share and now, even with the pullback, they are still at $68.50/share but were trading at $80, which was 23% higher!  I guess we can assume that these buybacks will go on forever and M&A will continue at a multi-trillion dollar paces – even while the stocks get more and more expensive and even as interest rises (and even if there's a global trade war) but that's the kind of thinking that got everyone in trouble in 2007/8 so I just want to remind you now, at the start of earnings season – to be very, very careful out there!  

Have a good weekend,

- Phil


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  1. Good morning all.

  2. Grand illusion well explained Phil

  3. Watching to see if DAX can hold 12,500 going into the weekend. Trump will be tweeting frequently while playing Scottish golf course. And this is the guy who complained that Obama played to much golf. How short are our f**king memories. We have lost all sense of past events. The daily bombardment of outrageous news under Trump has led to a collective numbness  The upcoming November elections are very important and I hope the American electorate shows up at the polling booths. 

  4. Good Morning.

  5. Trump is truly, truly insane and out of control! Goes on an interview in Britain and undermines the government of May (who I am not a fan of) and claims once again that he alone could do things better! They should throw him in the Tower of London! Why doesn't the GOP see how much damage this guys is doing to this country? Hint – tax cuts and SCOTUS. Party over country.

  6. Tax cuts will have a smaller impact because the economy is already growing:

    Thanks in large part to recently enacted tax cuts, U.S. fiscal policy has taken a decidedly procyclical turn—providing stimulus when the economy is growing. In fact, the projected increase in the federal deficit over the next few years would represent the most procyclical fiscal policy stance since the Vietnam War. This matters because many recent studies have found that fiscal stimulus has a smaller impact when the economy is strong, implying that the near-term boost to GDP growth could be two-thirds or less of that from previous tax cuts.

  7. denlundy – There are many of us with long memories with no illusions. Good will always overcome evil. Patience for the change to begin in November…..

  8. …maybe sooner… :)

  9. hope springs eternal and AMZN will grow into it's 280PE

  10. I still do not understand why you guys do not lock this clown in a cage and throw him overboard.

    May be I am just reading a comic book.

  11. Good morning! 

    Hopefully I have articulated my earnings concerns.  It's difficult to try to figure out the impact of buybacks and tax breaks for each stock but I guess we can assume the tax breaks are here to stay but buybacks driven by repatriated funds (in other words, taxes that were stolen from Obama's budgets and dumped into Trump's budget) are a one-time thing and that's where we have to be very careful about extrapolating growth.  

    Thanks Yodi.

    DAX/Den – 12,500 looks good this morning, will be bad if they can't hold that into the close (11:30).

    In the bigger picture, 12,800 is the more important line:

    Bigger picture here confirms 3,500 as key inflection point:

    Dow is below it's 25,000 key line still:

    That one is obvious.

    Nas 7,000 was the breakout – super-strong here but under 7,400 we have the run from 5,000 to 7,000 as 2,000 points (40%) so 400 more points is a normal 20% overshoot and not very meaningful and a pullback to 7,000 – even on a very healthy run – is almost inevitable.  

    TSLA earnings will be the first week of Aug, they are expected to lose $2.75/share (about $400M).  Now, if they made 5,000 model 3s in the last week of June for, say $40,000 each (being super-generous), that's $200M right there that they spent and couldn't possibly recoup by the EOQ so right there they are going to be off by 50% but what about the cost of building 2 additional production lines to hit their targets and running all their workers on double shifts?  That's got to be a lot too…

    Sense/Den – I was talking to a seemingly intelligent guy last night and he likes Trump essentially because of all the things Fox claims he does – 90% of which is pure fiction.  Sadly, he's way too typical of the average voter because Fox et al are great at the soundbites and so is Trump while the Dems have to go into DETAILS to get their points across and 90% of America falls asleep as soon as their point doesn't rhyme.  It's very, very sad…

    Happy Friday! 

    Big Chart – Can the NYSE do it?  

    Trump/StJ – Sure go to an ally's country and undermine their leader – that's perfectly normal behavior…  Imagine if someone came here and did that?

    AMZN/Mike – At least they keep doing new, cool things.  No buybacks there…

    Clown/Yodi – For the liberals, it's like we're being held hostage in our own country…

  12. Good article in the Economist:

    JUST a week into what could prove a long and grinding trade war launched against China by the United States, a curious feature of the conflict has already emerged: China will not, for now at least, dip into its traditional armoury of rhetorical bluster and belligerence. That marks a break with usual Communist Party propaganda, and even with its rhetoric of a few weeks ago.

    Then, the language was much more uncompromising. And as recently as June, according to the Wall Street Journal, in a meeting with a score of mainly American and European executives, President Xi Jinping promised a bare-knuckle approach in countering President Donald Trump’s punitive tariffs, the first of which, on $34bn of imported Chinese machinery and electronic parts, kicked in on July 6th. “In the West you have a notion that if somebody hits you on the left cheek, you turn the other cheek,” he reportedly said. “In our culture we punch back.”

    …More substantive are the instructions issued to media outlets by China’s propaganda authorities. China Digital Times, a California-based website, reports one such directive. In it, publications are told not to attack Mr Trump’s “vulgarity”, nor to engage in “a war of insults”. It repeats high officials’ calls for “calm and rationality”. Other diktats caution against conveying any sense of Chinese superiority, or claims that China can easily crush America in a trade war. Yet other instructions urge the press to play down China’s plan for global dominance in various technological sectors, known as “Made in China 2025”. It is almost as if officials are promoting a return to the late Deng Xiaoping’s dictum that China should keep a low profile.

  13. Hostage / Phil – To some extent, that is true of the opposition each time. The difference is that people felt that way under Obama while he was trying to provide healthcare to people, raise minimum wage, provide protection against lenders and save the auto industry. Exactly what Trump is trying to dismantle now! And how does that help the country?

  14. May Says U.S. Trade Deal Is Back on Track After Trump’s Criticism

  15. America’s Robot Geography

  16. Hostage/StJ – I don't know, I never liked Bush II but never felt like the country had been taken over by a ruinous Government – no matter what dumb things Bush did or what evil crap Cheney pulled – there was still a sort of backstop of decency where these was a line they couldn't cross.  That line is gone now and this administration simply does whatever it wants and effectively has no consequences as they now control Congress and the Courts and, as you note, work tirelessly to dismantle every inch of progress the Democrats worked to win for the average American since the Great Depression.  

    They thought Caesar was great at the time too but, only AFTER the Empire collapses – THEN you can see what a complete disaster his policies were.

    Image result for trump caesar

    /NQ marching back to 7,400, 24,950, 2,800 and 1,695 so all at significant lines simultaneously.  We're probably punching through now but we can short the laggard if they break back down.

  17. Talk about a pump and dump – here's a good view of how SPY is slammed up for 5 mins and then the same volume sells for the next 5 (to the suckers they drag in) and then back up for 5 mints and then it's sell, sell, sell into the close (as the ETFs are forced to buy Market on Close at the inflated price).  


    Way more red bars than green bars during the day yet they push it higher anyway.  

  18. B.O./Facebook – Inspiration and a Pitch. Is that all you got Barack???   


    Enjoy your Summer.  

  19. This is what it has now become:

    After claiming that his recorded interview with The Sun was “fake news,” Trump also targeted NBC and CNN as networks he generally despises.

    I mean, the Sun posted a tape of him talking! What does it take to prove a point. You could show him a video of him shooting another person and he would claim it's fake! It's simply surreal at this moment.

  20. Consumer Sentiment misses estimates

    • July Consumer Sentiment97.1 vs. 98.4 consensus and 98.2 prior.
    • Current economic conditions 113.9 vs. 116.5 prior.
    • Index of consumer expectations 86.4 vs. 86.3 prior.
    • Inflation expectation: 2.9% vs. 3.0% prior
    • China's trade surplus with the U.S. swelled to a record in June, a result that could further inflametrade tensions with Washington.
    • Exports to the world's largest economy rose 5.7%, while imports from the U.S. rose 4%, resulting in a trade surplus of $28.97B.
    • Separately, an explosion at a chemical plant in China overnight killed 19 people and injured 12, marking the latest deadly industrial incident in the country.
    • Soybean prices fell to their lowest in nearly a decade after the U.S. Department of Agriculture forecast domestic supplies will rise to the highest ever on expectations that tariffs in China, the world’s largest soybean purchaser, will cut into exports.
    • In its monthly supply and demand report, the USDA forecast stocks of soybeans for the 2018-19 crop year will come in at a record 580M bushels, far above its estimate of 385M bushels issued a month ago before China imposed tariffs on imports of U.S. soybeans.
    • The USDA sees soybean exports falling 11% next year to 2.04B bushels, with higher market share in other countries failing to offset the lost demand from China.
    • Soybean prices slid after the report, with July-dated contracts tumbling to as low as $8.26/bushel at the Chicago Board of Trade, the lowest since December 2008.
    • The agency projects a much different outlook for the corn market, forecasting a larger than expected 1.55-bushel drop in U.S. corn stockpiles in 2018-19, nearly 25% lower than a year earlier, and higher exports of the U.S. crop; July corn futures rose 1.6% to $3.365/bushel after the report.

    • Large-cap healthcare (NYSEARCA:XLV) is the place to be as a stronger dollar is a boon to revenue and it's likely to be less affected by trade worries, says RBC strategist Lori Calvasina, upgrading the sector to Overweight.
    • Alongside, she cuts industrials (NYSEARCA:XLI) to Market Weight, noting ETF inflows as having been replaced with outflows, trade fears, and possibly deteriorating corporate confidence on the way.

    Mastercard and Visa dip after major banks report

    • Mastercard (MA -1%) and Visa (V -0.8%) are slightly lower after a round of earnings reports from major banks.
    • JPMorgan analyst Sanjay Sakhrani says card activity from JPMorgan, Wells Fargo and Citigroup disappointed by showing a "mild" deceleration in volume growth.

    First Republic up as Q2 EPS beats; loan originations, wealth management rev. rise

    • First Republic Bank (NYSE:FRC) gains 2.4% in premarket trading as Q2 EPS of $1.20 beats by 3 cents, bolstered by strong loan originations and continued expansion of its wealth management business.
    • Loan originations, at $9.4B, its best quarter ever, vs $7.3B Y/Y.
    • Net interest income rose to $611.7M from $532.0M in Q1and $587.8M a year ago; net interest margin was 2.95% vs. 2.97% in Q1 and 3.16% a year ago.
    • Wealth management revenue rises to $104.9M, up 22% Y/Y.
    • Investment management fees $82.9M vs $68.8M in Q1 and $78.1M a year ago.
    • Total noninterest income $132.4M vs $109.4M in Q1 and $133.1M a year ago.
    • Total deposits rise 15% to $72.8B Y/Y.
    • Provision for loan losses $19.4M vs. $23.9M in Q1 and $13M a year ago.
    • Effective tax rate 16.8% vs. 19.2% in Q1.
    • Common equity tier 1 capital to risk-weighted assets 10.18% vs 10.47% at Q1 end and 10.72% at June 30, 2017.
    • Source: Press Release
    • Previously: First Republic Bank beats by $0.03, misses on revenue (July 13)
    • Wolfe Research weighs in on the entry of Southwest Airlines (NYSE:LUV) into Hawaii and the carrier's plan to subsidize low fares an increase in the credit card business.
    • Wolfe on LUV: "We are skeptical about LUV’s prospects in Hawaii because of its product relative to the wants of the Hawaii vacationer. While we’ve learned not to underestimate LUV, we are deeply skeptical about LUV’s ability to succeed in inter-island Hawaii."
    • Southwest plans to begin Hawaii nonstop service from Oakland, San Diego, San Jose and Sacramento.

    Restaurant sales improve in June

    • Restaurant same-store sales rose 1.1% in June to keep a trend of steady improvement, according to data from TDn2K.
    • Higher guest spending helped offset the 1.7% decline in comparable traffic during the month. For the first six months of the year, average check is up 2.9% to top the 2.2% pace seen last year.
    • "The good news for the restaurant industry is that households are not over-extending themselves as much as they had been. They are now saving a little more as well as spending more. That means the improved demand at restaurants should be sustained," says TDn2K economist Joel Naroff.
    • McDonald's (NYSE:MCD-1.4% after-hours on news that the Illinois Department of Public Health has launched an investigation into foodborne illnesses in the company's salads.
    • The IDPH says it has received confirmation of ~90 cases of cyclosporiasis, an intestinal illness caused by a microscopic parasite, and around a quarter of the cases reported eating salads from McDonald’s in the days before they became ill.
    • The agency says MCD is in the process of removing the salads from its Illinois restaurants and distribution centers, and will re-supply restaurants with salads from other suppliers.
    • Victoria's Secret turned in another soft sales month for parent L Brands (NYSE:LB), with a 1% decline in same-store sales in June amid its extended semi-annual sales event.
    • In past years, the VS semi-annual sale has been a significant traffic driver.
    • "We extended the sale time period versus last year by about two weeks and reduced pricing to drive traffic and clear inventory," notes a L Brands exec.
    • Shares of L Brands are down 46.3% YTD as the company continues to struggle to find relevancy with the Victoria's Secret brand with younger consumers.
    • Previously: L Brands lower after sales update (July 12)
    • The U.S. Senate report on Novartis' (NVS -0.2%) relationship with former Trump attorney Michael Cohen paints a more unsettling picture than the company's version of events. To wit:
    • Novartis declined to submit all of the documents requested by Senators Elizabeth Warren and Richard Blumenthal, including any documents related to internal communications about Mr. Cohen and his role with the company.
    • Its relationship was longer and more detailed than the company disclosed. Cohen and then-CEO Joe Jimenez talked over the phone at least four times over a six-month period and exchanged emails on issues including the Trump administration's drug pricing proposals, Novartis' potential investment in a small drug maker backed by private equity shop Columbus Nova and opioid litigation.
    • The company explicitly hired Cohen to gain access to key policymakers in the Trump administration, which he agreed to do.
    • Cohen encouraged Novartis, specifically Mr. Jimenez, to invest in the drug firm linked to Columbus Nova, itself tied to sanctioned Russian oligarch Viktor Vekselberg.
    • Cohen specifically referred to himself as Counsel to President Trump and was employed by the Trump organization. He did not establish a dedicated email address for his consulting company until May 2017.
    • Novartis continued paying Cohen ($1.2M in total) after determining that he could not provide the promised consulting services. It could have terminated the contract for failure to provide "satisfactory performance of services" which was a condition of payment.
    • Previously: Novartis takes issue with Senate version of interactions with Cohen (July 13)

    Adobe to bring Photoshop to iPad

    • Marking a shift in its strategy, Adobe (NASDAQ:ADBE) plans to offer a full version of its Photoshop app for the iPad (NASDAQ:AAPL) as soon as next year, Bloomberg reports.
    • That signals a next step in increasing subscription sales after the company successfully migrated its apps to the cloud; many of its best-known apps are still making a journey to smaller screens.
    • The company's current Creative Cloud media-editing products are based on aging architectures with different dependencies for particular devices.
    • Full cross-platform versions are no small endeavor. “There’s a lot required to take a product as sophisticated and powerful as Photoshop and make that work on a modern device like the iPad," says Adobe's Scott Belsky. "We need to bring our products into this cloud-first collaborative era.”

  21. SPY/Phil- any reason why we dont use SPY as hedge?

  22. T

    Do you believe the DOJ going for an appeal?

    This definitely will negatively impact T’s business and stock performance, having to detract from running of the business.

    Question is…how low can it go before the yield is too, too compelling? Dividend seems to be safe, from a FCF standpoint.

  23. stjean – Tdump and his actions are our reality. What would be surreal is if Croatia wins the world cup… ;)

  24. I don't know 1020! They looked pretty good so I would not be surprised! I am been predicting a French defeat each time so I can't be disapointed.

  25. FU HMNY!!!

    FU LB!!!!

    Have a great weekend ;-)

  26. SPY/Dave – Not much different than our QQQ upside hedge, same logic – pick a 2020 call with good leverage on a 30% gain so SPY at $280 x 1.3 = $364 and the 2020 $335 calls are $1.90 and would be $29 at goal for a $27.10 gain (1,426%).  Of course, if SPY just goes up 10% ($30), the 2020 $305 calls are $9.50, so a 375% gain on a 10% move in SPY is good leverage, right?

    So, if you take 3% of your portfolio and put it in SPY, you'll make 10% of your entire portfolio if SPY goes up 10% while risking, of course, 3% but realistically, you can stop out long before that happens.  

    T/Maya – They are going for an appeal, that's happening and T is tanking on that news:

    Not sure how excited I am about owning a telco that the President hates.

    Predicting French Defeat/StJ – That's been a winning bet in dozens of wars!  cheeky

  27. A little wisdom:

    There are three constants in life: Change, Choice and Principles.

    – Steven Covey

  28. LOL Phil… Actually I think that France has a winning percentage in wars! And we are 1-0 on US soil :-)

  29. One more:

    If you want to make others happy, PRACTICE COMPASSION. If you want to be happy, PRACTICE COMPASSION.


  30. This is a problem for the future:

    The situation is not limited to this area. There is a nationwide shortage of teachers — most acute in special education, science and math. The supply of new teachers is declining, according to recent research, as the demand for educators is swelling.

    Teacher turnover is a problem as well. Up to 50 percent of new teachers leave the profession in the first five years; experts estimate the teacher attrition rate is about 8 percent annually, with higher rates in urban districts.

    Of course, if we started paying them more and stop blaming them for all the problems in education, that could change. But a lower educated population is a good base for a populist.

  31. How much could Bezos put towards a teacher retention program before he noticed he was paying for it?

  32. I would love to see more $$$ from these progressive billionaires…So much to be done…

  33. Wars/StJ – You are right, I was thinking of Queen Anne's War or Chickasaw, Carnatic, Le Loutre's, the Indian War, West Indies, West Africa, Morocco, Haiti… but since then you guys have really cleaned up your act!  

    Teachers/StJ – Hey I know, why not compensate for the shitty wages by promising them great retirement benefits and then, when it's time for the teachers to retire – say you can't afford to pay them and they were greedy for asking and they are ruining America with their liberal benefit packages.  Seems to work every time…

    Teachers/Mike – Well, let's see, $120Bn at 2% is $2.4Bn and that's enough to pay 50,000 teachers $48,000 salaries – certainly he wouldn't miss that.  

    Money/1020 – Well if we were to say, bring our military spending DOWN to 2% to align with NATO, that would be just $400Bn and we'd have $300Bn for teachers, which would be enough to pay all 3.6M US teachers $83,333 a year!   That is why I have to say "FU Donald Trump and all the crooks in Congress who vote for this insanity!!!"

    Image result for education military funding

    Who spends more money on military than education – Dictatorships and US!

  34. 12 more Russians to add to the other 13 but its still very early days on understanding if the election was hacked bigly or otherwise.

    SI $15.80 is hopefully looking like a floor.

  35. The Rosenstein indictment news interrupts Tdumps visit with the Queen!…. :)

  36. Phil/money – If wishes were dishes, we'd be eating off paper plates!

  37. Phil/ kc- down the drain again

  38. st j / to be clear most education spending is by states and localities, not fed govt. (first graphic must include state and local spending, second one doesn't – compare ratio of defense/ education)  Maybe stupid but that's how it is.  And this hodgepodge exacerbates inequalities – rich cities/towns/suburbs generally spend more per 'general' education kid than nearby poor districts.  Though some federal money flows to poorer districts and it is a shame that's being cut.

  39. looking like it will not be too long before you can double down again with HMNY..

  40. Russell is having a fun day…

    25/Malsg – Well, you know it's a huge conspiracy with fake news and rogue FBI and Justice department agents all out to get Trump AFTER letting him get elected President despite their plot to undermine him that started the investigation that found so much evidence against him.  So 4 more years, I guess?

    Rosenstein/1020 – Good timing!  

    /KC/Ravi – Nasty but back to earlier lows so we'll see:

    The daily composite indicator started at a high of 114.40 US cents per pound on 1 June, but quickly declined to 110.41 on 7 June. For the rest of the month, the daily composite indicator ranged between 108.98 US cents per pound and 110.72 US cents per pound before falling to 108.68 US cents per pound on 29 June. Prices in June are likely reflecting the greater availability of coffee on the international market from new crops for April-March producers, notably Brazil.

    Indicator prices for all coffee groups fell in June 2018, though the largest month-on-month decrease occurred for Brazilian Naturals, which fell by 3.7 per cent to 115.10 US cents per pound.

    Both Colombian Milds and Other Milds decreased by 1.2 per cent to 138.55 US cents per pound and 134.03 US cents per pound respectively. The monthly average Robusta price fell by 3 per cent to 86.07 US cents per pound. The average arbitrage in June, as measured on the New York and London futures markets, rose by 0.3 per cent to 42.79 US cents per pound.

    Global coffee production in 2017/18 is estimated at 158.56 million bags, 0.3 per cent lower than in 2016/17.

    Arabica output is expected to decline by 6.6 per cent to 97.16 million bags, while Robusta production is predicted to grow by 11.5 per cent to 61.40 million bags.

    Since overall production is not up and I doubt demand is down, I think it will come back over time.  Also, /KC is an Arabica contract and that's actually lower in production this year, so that should help too.

    We're playing /KCM9 long, which is a year from now and now $121.25 as we expected a rocky summer.

    Education/Rexx – Being cut on all fronts, unfortunately.  

    HMNY/Jabob – At this rate, soon!  

    Market Madness: Helios and Matheson CEO Feels Bullish, Do You?


    Wednesday afternoon, TheStreet's intern, Taylor Nicole Rogers, spoke with CEO Ted Farnsworth and he's confident that surge pricing and creating their own content will make them profitable by the end of the year.


    When asked about the service's new competition from AMC, Farnsworth said that AMC's investors are the ones that ought to be worried. Farnsworth said according to MoviePass' user data from before H&M slashed it monthly fee to $9.95, the $19.95 price point where the AMC service is creates the kind of heavy users that make these services lose millions.

  41. Education / Rexx – Fully aware, thanks! My wife is actually in education. It's a fight everywhere though as seen with the strikes in many states.

  42. Phil/ kc- thx

  43. Dollar still strong at 95, breaking up from here will really hurt commodities.

    Look how weak the Euro has gotten – that's been keeping their markets up:

    So the good news is your stocks are up 3% but the bad news is the currency they are valued in is down 6%.

    /YM at 25,005 and /ES at 2,802 are the downside laggards – if either of them breaks you can short the others until either of them moves back up or /RTY takes back 1,695 or /NQ takes 7,385 (ie, very tight stops).

  44. Fed Monetary Policy Report looks at borrowing, bank risks, consumer spending

    • Today's monetary policy report from the Federal Reserve discusses a number of issues that helps it decide how to formulate monetary policy. Here are a few  highlights:
    • In the private nonfinancial sector, borrowing by highly levered and lower-rated businesses remains elevated, although the ratio of household debt to disposable income continues to be moderate.
    • Housing market has leveled off this year.
    • In the financial sector, vulnerabilities stemming from leverage remain low, partly reflecting strong capital positions at banks. Some measures of hedge fund leverage, though, have increased.
    • "Vulnerabilities associated with maturity and liquidity transformation among banks, insurance companies, money market mutual funds, and asset managers remain below levels that generally prevailed before 2008,"
    • Q1 consumer spending has picked up in April an May, with personal consumption expenditures rising at an annual rate of 2.25% compared with consumer spending growth of 0.9% annual rate in Q1.
    • Net exports had roughly neutral effect on real U.S. GDP growth in Q1.
    • There was no discussion in the the report about how recently announced tariffs could affect economic growth.
    • U.S. 10-year Treasury yield down about 1 basis point to 2.831%, while 2-year yield falls  3 basis points to 2.574%, bringing the spread to almost 26 basis points, a tad wider than 24 bps late yesterday.

    U.S. government posts $75B deficit in June

    • The U.S. government had a $75B budget deficit in June, following $90B deficit in May, compared to the forecast of $98.2B.
    • When accounting for calendar adjustments, the government's deficit was $26B compared to an adjusted deficit of $48B in June 2017.
    • The deficit for the fiscal year starting last October, was $607B, compared to a deficit of $523B in the same period of fiscal 2017; Adjusted basis, the gap of $610B compared with $520B in the prior period.
    • Unadjusted receipts totaled $316B (-7% Y/Y), while unadjusted outlays were $391B (-9% Y/Y).

    China's trade surplus with U.S. hits record as exporters rush to beat tariffs

    • China's trade surplus with the United States swelled to a record in June to $28.97B, signs exporters were rushing shipments before tariffs come into effect, suggest the spike in the surplus was a one-off, as analysts expect a less favorable trade balance for China in coming months as duties on exports starts.
    • Trump has demanded Beijing cut the trade surplus, could further use the latest result to ratchet up pressure on China after both sides last week imposed tit-for-tat tariffs on $34 billion of each other's goods. Washington has warned it may ultimately impose tariffs on more than $500 billion worth of Chinese goods – nearly the total amount of U.S. imports from China last year.
    • China's June exports rose 11.3% Y/Y beating forecasts for a 10% and down from a 12.6% gain in May.

    Spain raises deficit targets for 2018, 2019

    • Spain raised its public deficit target to 2.7% of economic output in 2018 from a previous 2.2%, Economy Minister Nadia Calvino said on Thursday.
    • Calvino said Madrid was also now aiming for a ratio of 1.8% in 2019, compared with a previous target of 1.3%.
    • The Bank of Spain warned last month that measures included in the 2018 budget, including the biggest rise in pension payments for several years, would push the shortfall beyond the original target.

    J.P. Morgan ups oil price forecast, lowers demand growth outlook

    • J.P. Morgan raises its outlook for oil prices while trimming its forecast for global crude demand growth this year amid increasing uncertainty over international trade.
    • Raising its forecast for Brent crude to average $70/bbl in both 2018 and 2019, up from an earlier forecast of $65 in 2018 and $60 in 2019, JPM says "uncertainty around actual OPEC production increases, current budget constraints and sanction effects could mean near-term oil prices remain elevated."
    • JPM revises its 2018 demand growth outlook to 1.2M bbl/day from 1.4M previously, while edging up its 2019 forecast to 1.1M bbl/day from 1M.
    • “We expect continued price fluctuations within a wide $50-80/barrel range, with the strip gravitating lower over the medium-term and a wider Brent/WTI crude differential," JPM writes.
    • The total U.S. rig count rose by 2 to 1,054, its second straight increase after three weeks of decline, according to the latest Baker Hughes survey.
    • The active oil rig count was unchanged at 863 and gas rigs gained 2 to 189 while two rigs remained classified as miscellaneous.
    • August WTI crude trades at $71.12/bbl, little changed by the data.
    • Exxon Mobil (XOM +0.9%), "once a 'perfect machine,' is running dry," according to a WSJprofile, "struggling as the energy business shifts and investors look elsewhere for profits."
    • XOM's oil and gas output of ~4M bbl/day is no higher today than it was after its merger with Mobil in 1999, and even if it succeeds in doubling last year’s $15B in earnings by 2025, the company still would be making far less than in 2008, when it set a record for annual profits by a U.S. corporation at $45B.
    • CEO Darren Woods has taken several steps to shake up the company's insularity and dump less profitable areas, and WSJ says XOM is weighing reducing its exposure to Canada, where it has operated for 130 years, and is developing a more robust trading operation.
    • But the centerpiece of Woods’s turnaround effort is a major increase in spending – next year, XOM is set to spend $28B, 45% more than in 2016 – a plan that so far has been unpopular with investors: The price of crude has surged ~60% in the past year but XOM shares are up less than 5%.
    • "Most investors like Exxon, but they like other companies better,” says Mark Stoeckle of Adams Funds. “The market is not willing to reward Exxon for spending today in hopes that it will bring good returns tomorrow.”

    • China’s iron ore imports fell 11.6% last month, as the country intensifies its push to clean up its environment and by rising stockpiles at ports.
    • Iron ore imports reached 83.2M metric tons in June, according to government data, down from May’s 94.1M metric tons and from 94.7M metric tons in June last year.
    • Iron ore stockpiles at Chinese ports stood at 156.4M metric tons last week, not far off the early June record of 162M metric tons and nearly 40% higher than the five-year average of 113.4M metric tons.
    • Major suppliers of iron ore to China include Australia's BHPRIO and OTCQX:FSUMF.
    • Alongside a recommendation for the legalization of recreational pot, the New York Health Department suggests expunging criminal records of residents who have been convicted of marijuana offenses.
    • The report says the state could reap nearly $700M per year by taxing the estimated 300 tons of cannabis already being smoked by New Yorkers. - That's just the taxes on profits!
    • There was a bit of skittish trading on Tesla (TSLA) earlier after M Science warned that conversion rates on the Model 3 are softer than anticipated for the first week of July.
    • M Science has made some striking calls in the retail sector, relying on "alternative data" to shape its analysis apart from just defending prior ratings. The research firm appears to be new to the Tesla debate.
    • Shares of Tesla have fought their way all the back of positive territory on the day.

    Gogo slides after business plan call; Northland skeptical

    • Gogo (NASDAQ:GOGO) has turned 11.5% lower after the company's conference call discussing its new business plan, Gogo 2020.
    • “The difference in view of potential strategic partners of our value and Wall Street’s sense of our value is as striking as I have ever seen,” CEO Oakleigh Thorne said.
    • The company's targeting break-even free cash flow for 2020 with a plan aimed at cost structure improvement along with balance sheet strengthening and revenue growth.
    • Part of the call centered on debt refinancing, particularly the convertible notes due March 2020, and refinancing of those will be considered in the context of potential strategic deals and dilution impact, says CFO Barry Rowan. "No one is more concerned about equity dilution than Oak [Thorne]," he says, and refinancing doesn't have to happen all at once. (h/t Bloomberg)
    • Meanwhile, Northland Securities isn't buying the new plan. "We’ve seen this movie before with enticing the street with impressive out year EBITA growth targets," says analyst Paul Penney, who sees "minimal equity value left in GOGO's shares."
    • Most of the company's wins with airlines have come from "funded deals," he says, and he questions how debt service costs won't go up, risking the break-even FCF projection. He's projecting $848.4M revenues vs. the company's sunnier outlook of $865M-$935M.

    AT&T staying course on Time Warner in wake of DOJ appeal

    • There's no change to AT&T's (T -1.9%) approach to integrating the former Time Warner now that the Justice Dept. has appealed the court decision allowing the merger to proceed, CEO Randall Stephenson says.
    • "We're about executing our plan," he tells CNBC from Sun Valley. "We think the likelihood of this thing being reversed and overturned is really remote. It's a very narrow path that would have to be traveled to get this thing reversed in any way."
    • "The merger is closed. We own Time Warner."
    • In credit ratings agencies, Fitch expects the government's appeal to fail, though anything's possible with the three judges who are considering the appeal. And Moody's says its ratings on AT&T are unchanged following the news.
    • The appeal may last five or six months, Stephenson says.
    • Earlier, AT&T was cut at Raymond James on the news. Meanwhile, Oppenheimer agrees with Stephenson that the appeal has a "low probability" of success. "Unfortunately, it is also likely to keep T's stock under pressure until it is resolved," says analyst Timothy Horan.

  45. Nope, still hanging on – can't find a good short.  Just dribbling into the close though.  

    I'd say it was a low-volume week but it's getting normal to be this low.  Just last year the AVERAGE was 120M/day – now we're lucky to hit 100M.  

    Date Open High Low Close* Adj Close** Volume
    Jul 13, 2018 279.17 279.93 278.66 279.72 279.72 33,764,928
    Jul 12, 2018 278.28 279.43 277.60 279.37 279.37 59,997,200
    Jul 11, 2018 277.15 278.04 276.52 276.86 276.86 77,054,700
    Jul 10, 2018 278.41 279.01 278.08 278.90 278.90 51,966,800
    Jul 09, 2018 276.55 277.96 276.50 277.90 277.90 50,550,400
    Jul 06, 2018 273.14 275.84 272.71 275.42 275.42 66,493,700
    Jul 05, 2018 272.17 273.18 270.96 273.11 273.11 56,925,900
    Jul 03, 2018 272.87 272.98 270.42 270.90 270.90 42,187,100
    Jul 02, 2018 269.51 272.04 269.24 271.86 271.86 63,554,800

    You know when you get good volume?  In a sell-off!  

    Apr 02, 2018 262.55 263.13 254.67 257.47 256.32 186,286,300
    Mar 29, 2018 261.12 265.26 259.84 263.15 261.97 111,601,600
    Mar 28, 2018 260.75 262.64 258.58 259.83 258.67 146,452,300
    Mar 27, 2018 266.17 266.77 258.84 260.60 259.44 129,941,400
    Mar 26, 2018 262.13 265.43 259.41 265.11 263.92 141,956,100
    Mar 23, 2018 264.17 264.54 257.83 258.05 256.90 183,534,800
    Mar 22, 2018 267.91 268.87 263.36 263.67 262.49 148,785,900
    Mar 21, 2018 270.90 273.27 270.19 270.43 269.22 78,709,600

    Maybe this time is different – but I wouldn't bet on it…

  46. Don't forget, next week is expiration week and I'm going to be looking to purge winners from the portfolios to lighten up – just in case we top out.  So be prepared to do some work for a change! 

    Have a great weekend,

    - Phil

  47. The Sum of All Fears: 6 Big Concerns of Investors

     1. Domestic Politics Uncertainty   Staff turnover, elections, and special counsel investigation 
     2. International Relations   Protectionism and tariffs
     3. Economy  Decelerating manufacturing and service sector growth
     4. Inflation  Rising labor and commodity prices
     5. Interest Rates  Hawkish Fed continues monetary tightening
     6. Regulation/De-Regulation  Data privacy regulation risks

  48. London Trump Protest is biggest since Iraq War Protest of 2003:

    Well, Trump does like big turnouts…

    The FBI is saying that Russian government agents have been inside state voting systems and there are sitting congresspeople who want the investigation shut down. Can you imagine?

    Tomorrow we take over the World! 

    Middle Class Consumption Growth Projected:

    Not a random tweet, this is from TSLA's whistleblower's lawyer:


    Time for the @SEC_Enforcement to act. Not an accident @elonmusk has been silent on the allegations. Let sunshine be the cleanser for
    Will Tesla Be 'Tripp'ed' Up By A Whistleblower? via @forbes 

    When asked if he was short, Meissner said:

    "I have ZERO position on $TSLA short or long and never have. Although frankly I should, based on what I, and everyone, now knows."

    In one of the all-time great troll jobs in U.S. political history, American patriot Congressman Elijah Cummings ignored Republican objections and asked his staffers hold up large photos showing Trump aides who pleaded guilty so far in the Mueller probe.

  49. Just play this video for anyone who still thinks the FBI was/is conspiring against Trump on the basis of a single, private text message the GOP committee managed to dig up:

    I'd say that's pretty clear….

  50. Andew Sullivan goes hyperbolic on Brexit but no matter what, there will be tears!

    Am I exaggerating? Among the immediate doomsday possibilities the government itself is worried about in a crash exit are the effective, immediate collapse of the port of Dover — grinding trade to a halt — and the dispatch of thousands of electricity generators on barges in the Irish Sea to keep Northern Ireland’s lights on, because the province’s ability to share a single electricity market with the whole island of Ireland would end with an E.U. exit. Northern Ireland itself could explode in sectarian violence again if a hard border is erected between north and south, as it would have to be. Scotland would move toward independence. Critical shortages of food, fuel, and medicine would open up within two weeks, by the government’s own estimation. The military would have to be deployed to ensure transportation of essentials. Stocks and the pound would plummet. A steep recession at home, and maybe also abroad, could follow. It would be one of the most harmful things a democratic country ever did to itself, or to its neighbors.

  51. FBI / Phil – These guys should be erecting a statue for Peter Strzok, not grilling him. He was one of a handful of people who knew about the Russia investigation and even though he hated Trump, he didn't leak a single thing before the election as opposed to what happened with the Clinton investigation. That guy alone is as responsible for Trump's being president as much as James Comey and Strzok was actually doing his job….

  52. Not mars, a dust storm in Arizona!

    Republicans are more likely than Democrats to consider Russia an ally or friendly to the U.S., 40% to 25%.

    They found this in Egypt and have no idea what it is so what are they going to do?  Open it, of course – that's how all horror movies begin:

    Don't open this either:

  53. GDP / Phil – Keep in mind that Trump said yesterday in the Sun interview that he already doubled the GDP!

  54. Well he did if it’s 4%,  but it should be up 5% from the repatriation of $2.5 trillion alone! 

  55. Gap Between Trump and Justice Dept. Officials Grows Starker

  56. Yeah, this is just too many coincidences

  57. U.S. and Allies Consider Possible Oil-Reserve Release

  58. STJ – Congratulations on France winning the World Cup ! ! !

  59. Congrats StJean!  A Dynasty!!!  :)

  60. U.K. Poisoning Inquiry Turns to Russian Agency in Mueller Indictments

  61. Thanks Albo and 1020! Not the prettiest of win but we'll take it. There has not been a repeat winner in a long time but this is a young team. Maybe there is hope.

  62. Tracing Guccifer 2.0’s Many Tentacles in the 2016 Election

  63. The $247 trillion global debt bomb

  64. Jared Kushner’s family firm accused of pushing out tenants

  65. Asian shares drift lower as China data, trade cast shadows

  66. Cryptocurrency Exchanges Are Getting Hacked Because It’s Easy

  67. We Need a Food Revolution

  68. Trump, on Eve of Putin Meeting, Calls E.U. a Trade ‘Foe’

  69. Good morning!

    We're flat into the Trump/Putin debriefing. 

    Fortunately, we have Putin's notes:

    Don't worry, it's only a coincidence that this meeting is following these protocols…  They are meeting right now, one on one – no witnesses…

    Otherwise, the market doesn't care that Trump called the EU "a foe" so really, what can possibly derail this rally?

    Meanwhile, screw politics, we have more important things going on this week:

    Powell testifies before Congress for the first time tomorrow – that's a biggie.  June Retail Sales this morning, Industrial Production tomorrow, Housing Wednesday and the Beige Book and NY and Philly Feds this week too!  So plenty of data to chew over.

    8:30 am Retail sales June   0.5% 0.8%
    8:30 am Retail sales ex-autos June   0.3% 0.9%
    8:30 am Empire state index July   -- 25.0
    10 am Business inventories May   -- 0.3%
    9:15 am Industrial production June   0.6% -0.1%
    9:15 am Capacity utilization June   78.3% 77.9%
    10 am Jerome Powell testimony        
    10 am Home builders' index July   -- 68
    8:30 am Housing starts June   1.312 mln 1.350mln
    8:30 am Building permits June   -- 1.301mln
    10 am Jerome Powell testimony        
    2 pm Beige book        
    8:30 am Weekly jobless claims 7/14   220,000 214,000
    8:30 am Philly Fed July   22.0 19.9
    10 am Leading economic indicators June   -- 0.2%
      None scheduled

    On the whole, I still like the short side and we'll be looking to cash a lot of positions in our portfolio reviews.  /NQ below 7,400 (tight stops above for all) is good as is, /YM 25,000, /ES 2,800 and /RTY 1,690 – 3 below and short the laggard is the safest way to play but I'm hoping NFLX disappoints and hurts the Nasdaq and, of course, it's time for negative AAPL rumors!