Confidently Overconfident
It’s one thing to be confident, dear reader. It’s another thing entirely to be blindly overconfident.
Today, we saw Wall Street give a pause to last week’s massive rally, following one of the most devastating monthly U.S. jobs reports ever. It seems that more than a few analysts are starting to realize just how dire the U.S.’s economic situation is.
For instance, ING Chief International Economist James Knightly does not buy into all the “quick recovery” hype. This morning, ING projected a 7% decline in U.S. gross domestic product. According to Knightly, 2020 will see a drop in corporate profits that will “dwarf” the 2009 financial crisis.
“Equally, the poor transparency for corporate profits — where even Amazon and Apple are struggling for guidance — suggests investors will need some strong compensation for holding equities,” ING said.
The problem, as ING notes, is that price to earnings (P/E) ratios are skyrocketing. That’s because stocks surged 35% off their March lows, while earnings fell off a cliff. The composite forward P/E ratio for S&P 500 companies currently rests near 23.
In other words, S&P 500 stocks trade at 23 times their expected earnings growth for the next five years!
Why should you care?
Because this figure is higher than any other such reading taken since the dot-com bubble. You know, that time in the market when just having a “dot-com” after your company name got you a multibillion-dollar valuation? No business plan required.
“In uncertain times like these, higher earnings expectations or lower valuations may be needed to keep equity markets supported. We err towards the latter,” ING noted.
Translation: Companies will either earn up or burn up.
The Takeaway:
“Turn bearish? In our moment of triumph? I think you underestimate the economy’s changes!” — Grand Moff Tarkin, if he were an investor … probably.
For those who don’t know, Tarkin was an Imperial admiral in charge of the Death Star in Star Wars: The Empire Strikes Back. It didn’t turn out well for him…
Right now, Wall Street has that same kind of overconfidence. On average, analysts expect a 20% drop in earnings for S&P 500 companies this year, followed by a 25% rebound in 2021. This is clearly a best-case scenario.
For example, everyone knows that corporate P/E ratios will skyrocket next quarter if stocks continue to rally. That’s because the “E” for earnings dropped right off the face of the earth, while stock valuations continue higher.
Investors expect a significant economic rebound from what they see as an artificial suppression of economic growth.
An arti-what now?
Wall Street thinks all we have to do to fix this problem is flip a switch and turn the economy back on. End the stay-at-home orders, and we end up right back where we started. Easy peasy.
It doesn’t really work like that, and you and I both know it.
Ohio Governor Mike DeWine put it best this weekend in an interview on Fox News: “The economy’s not going to open no matter what we do, whatever we order, unless people have confidence.”
Investors have confidence because the Federal Reserve props up the market with unlimited stimulus.
But who props up the U.S. consumer? Who gives us confidence?
Sure, some people have (or had) $1,200 stimulus checks, but the virus is still here. It’s still spreading, and there’s still no cure, treatment or adequate testing.
Hit those three marks, and you’ll give consumers confidence once more. Until then, you can flip all the “economic restart” switches you want. The lights may come on, but nobody’s leaving home.
I mean, the last market collapse brought an 18-month bear market … from December 2007 to June 2009. The recession that followed lasted even longer … and we just saw all the jobs created since wiped out in a month.
We’ll find normalcy again sooner or later … but Wall Street has tunnel vision on the sooner, when you need to prepare for the later. You need to protect your wealth now … to even stand a chance at roaring back with the market.
The Good: Amazonian Theatrics
What do you do when the Academy of Motion Picture Arts and Sciences tells you that your streaming movies aren’t eligible for an Oscar because they’re not in theaters?
Why, you buy your own theater chain, of course!
Amazon.com Inc. (Nasdaq: AMZN) has reportedly expressed interest in buying AMC Entertainment Holding Inc. (NYSE: AMC) — the U.S.’s largest silver screen operator.
According to sources at the Daily Mail, AMC and Amazon held talks about a potential buyout, but it’s unclear if those talks are still ongoing.
Such a buyout would be a major coup for Amazon — especially against the snooty Academy and its archaic rules for Oscar qualifications. Meanwhile, nearly bankrupt AMC could clearly use any lifeline it can get.
AMC investors certainly like the idea, sending the stock nearly 30% higher today. That said, if you don’t already hold AMC stock, don’t chase this rally on the rumor.
The Bad: Down Under Armour
I don’t know what all those new Peloton owners wear for their workouts, but it clearly isn’t new gear from Under Armour Inc. (NYSE: UA).
The sporting apparel maker reported worse-than-expected first-quarter results and pulled its 2020 outlook.
For the quarter, Under Armour earnings plummeted to a $0.34-per-share loss, as revenue fell 22.5% to $930.24 million. Analysts expected a loss of $0.19 per share on $954.6 million in sales.
What’s more, Under Armour is restructuring to cut costs — a move it started even before the COVID-19 lockdowns. The company estimates $475 million to $525 million in restructuring costs this year.
And if that wasn’t enough, Under Armour still deals with accounting probes from both the Securities and Exchange Commission and the Justice Department.
The company clearly needs a protein bar or a Snickers … or something. UA shares are down more than 67% since their June 2019 highs, and they don’t appear ready to rebound any time soon.
The Ugly: Tesla Gets Musky
What makes Elon Musk guard his musk? Courage?
Nay … profits!
Tesla Inc.’s (Nasdaq: TSLA) CEO ramped up his anti-lockdown rhetoric last week.
Musk threatened to move Tesla’s headquarters from California to Texas in response to the former’s orders to prevent the automaker from reopening its Freemont factory. Tesla also filed suit against Alameda County in a move to invalidate those orders.
Musk believes the shutdown hurts Tesla’s business, and he’s probably right to a degree. However, if the latest sales data out of China is any indication, Tesla orders won’t flood in anytime soon.
According to the China Passenger Car Association, Model 3 sales plunged 64% last month. Tesla sold only 3,635 Model 3s in April in China, compared to 10,160 in March.
“That’s understandable,” you might think. “China’s still recovering, and no one is buying cars right now … especially electric cars. You’re overreacting!”
Well … that’s not quite true. Overall, electric vehicle (EV) sales rose 9.8% month over month in China for April. So, the Chinese are buying EVs, just not Teslas.
Great Stuff has long been bullish on TSLA … but only when Elon gets out of the way. Per our former point about flipping the U.S.’s economic switch, Tesla could reopen production now, but it might not mean very much at all if considerably fewer people are buying.
In short, Elon Musk is once again damaging public sentiment surrounding Tesla’s brand, with very little gained to show for it.
If you’ve followed along with Great Stuff’s romp through this hectic earnings season, our latest Chart of the Week shouldn’t surprise you much.
Posting an earnings calendar during earnings week? It’s a bold move, Hargett, let’s see if it pays off.
Courtesy of Earnings Whispers on Twitter, here’s what excitement is in store this week:
Now, you may not see as many familiar names at first in this earnings roundup as in past weeks. (Why so many boring blue logos, by the way? It’s time we jazz things up with the “ULTRA RAD X-TREME” styles everything had in the late ‘80s.)
Nonetheless, what we’re looking for here in this week’s earnings are the lesser-known hints toward the global economy’s health — the findings that won’t show up in payroll numbers or manufacturing reports.
We want the story behind the story here. Hey, that’s why you read Great Stuff to begin with no? Here are four quick takes to look out for from the earnings confessional:
- We’ll see how the cannibas sector stacks up in the stay-at-home haze with Tilray Inc. (Nasdaq: TLRY) and the “reverse split refreshed” Aurora Cannabis Inc. (NYSE: ACB).
- Sony Corp. (NYSE: SNE) can give us a slight glimpse at electronics spending, while JD.com Inc.’s (Nasdaq: JD) report will show the nitty-gritty in China’s consumer spending. Heck, I’m even looking forward to hearing how Jumia Technologies AG (NYSE: JMIA), the “Amazon of Africa,” has navigated the pandemic market.
- If business is moving … people are shipping. With much of the world’s ship-based storage now backed up, Diana Shipping Inc. (NYSE: DSX) should give us a better grasp on the world’s economy at sea. And while we’re out sailing (or not), we’ll see how Norwegian Cruise Line Holdings Ltd. (NYSE: NCLH) is holding up (or not).
- The Oz behind the networking curtain, Cisco Systems Inc. (Nasdaq: CSCO) might become our remote-working economy’s bellwether with its vital role in communications.
So begone, boring earnings! There’s great stuff in every bag of Cracker Jack earnings … even if it’s just a stick-on tattoo.
That’s a wrap for today, but you can always catch us on social media: Facebook and Twitter. We hope you’re staying safe out there!
Until next time, stay Great!
Regards,
Joseph Hargett
Editor, Great Stuff
