Better Watch Your Step on Wall Street
Has this equity market stepped into quicksand? Let's take a look at earnings, and how some former tech favorites are not looking so 'magnificent' right now.
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The Pit and the Pendulum
The entire surface of this metallic enclosure
was rudely doubled in all the hideous and
repulsive devices to which the charnel
superstition of the monks has given rise.
The figures of fiends in aspects of menace,
with skeleton forms, and other more really
fearful images, overspread and disfigured the walls.
- The narrator awakens within the confines of a darkened, semi-lit prison riddled with hidden traps, and surveys the horrors around. ... Edgar Allen Poe, 1842
Spooky, Scary
No, it's not Second City Television. It's the heart of earnings season and it's starting to get a little nasty out there, gang. The week of earnings that so many had looked forward to, is off to more than a wobbly start. Equity markets had managed to reach and then stay near all-time highs ... heck, the Nasdaq Composite made an all-time intraday high only yesterday. Then, why does that seem like more than a few hours ago?
For long time readers who've heard my "quicksand story" I apologize, but others might appreciate it. I've seen quicksand at work. The individual doesn't go down slowly. They disappear in a shot. A long, long time ago, in a jungle far, far away, we were out on patrol. This is before GPS, before night-vision, and with radios that worked far less reliable than what they have today. Some of you old vets will remember the PRC-77.
I was a corporal, acting as squad leader. I had a kid named Lewis walking point. Good kid, immigrant from Haiti. Smallest guy in the squad. His best friend, because they were both Haitian immigrants, was this guy, Dixon, the biggest guy in the squad who carried the machine gun. Dixon had played some college football, and had been invited to camp with the Jets. Having been cut, and with no job, he enlisted. Another great guy.
As leader of this 13-man band, I was trying to ensure we were not noticeable, as we were war gaming against two 13-man teams of Ranger-qualified Army Pathfinders doing long range reconnaissance patrols. There was some pride at stake. They were great in the jungle. We were great in the jungle. We didn't want the Army to beat us. They didn't want to be beaten by Marines. I had us spread out with the point, rear guard, left and right flanks away from the main body. I am in the center with the radio man reading my map and compass as we move. I am trying to keep us in streams and brooks so as not to be tracked.
Note: Travelling through rain forests that have not been surveyed with a map and compass is among the most difficult things done in the infantry. There is nothing in the distance. Each time one shoots an azimuth with his (or her) compass, the route becomes a little less accurate. You'd like to shoot that azimuth at a radio tower or church steeple in the distance, not over and over again at the next tree sometimes less than ten feet away.
Long story short. Lewis completely disappears from my vision in what seemed like a second. The first fire team goes prone and sets up a defensive position, not knowing what happened. We were wearing soft covers and boonies, not Kevlar helmets like today's young warriors. No body armor, either. Our Vietnam-era sergeants had taught us to be swift and silent. Lewis' soft cover was sitting on top of this smelly, wet, brown disgustingness. I mean, he was gone.
Up comes his best friend, the size of an offensive lineman in a hustle. He throws the pig (M-60 machine gun) to my assistant squad leader and plunges his giant arm into the muck, all the way up to his face. He feels around. He's visibly scared. His best pal is probably dying. Suddenly, with the guttural roar of a giant, Dixon gets to his feet and with one arm, raises his little friend out of the disgustingness and with brute strength fully extends that arm, Lewis gasping for air in his massive friend's hand.
Lewis was too disgusting to clean off and was visibly shaken. I put someone else on point, and let Lewis walk with me in the center until he regained his composure. We proceeded on with the mission. End of tale. I have seen what quicksand can do. I have also seen the brotherly love of one man for another. Back to where I thought I was going with this story. Has this equity market stepped into quicksand?
Bigger Boats?
On Wednesday, Advanced Micro Devices AMD was slapped around for a beating of 10.6% after meeting earnings expectations, and guiding higher for sales of certain high-end chips, but showing a lackluster performance for others. This seemed to overshadow the 2.8% gain made by Alphabet GOOGL, despite Alphabet being a member of the "Not So Magnificent Seven" Sure, it appears that Google has defended its "search and advertising" businesses, while improving margins. That is what led the Nasdaq Composite to that intraday record high on Tuesday, but don't forget, the Nasdaq Composite closed down on the day.
GOOGL, for that matter, is down full percent overnight into Thursday, after both Meta Platform META and Microsoft MSFT both posted what appeared to be solid quarters, but ran into disappointed investors overnight. As I work my way through the zero-dark hours on the morning of Halloween, META and MSFT are both trading about 3.5% lower.
Why? For META, the Family Daily Active People metric fell short of expectations for the third quarter, while the company signaled an increase in capital spending on AI infrastructure. How about MSFT? Capex spending printed higher than expected for the quarter completed as operating profits driven by the Intelligent Cloud and More Personal Computing segments disappointed despite revenue beats for those very segments. Microsoft's current quarter guidance failed to hit its mark as well.
In full disclosure, I have been trading MSFT overnight and am intentionally long fewer shares this morning than I had been on Wednesday. Microsoft has fallen to my fifth largest allocation from second place on my book. Readers may recall that I had reduced Microsoft back in the summer, while adding to SoFi Technologies SOFI. SOFI then appreciated and moved into the top slot.
Apple AAPL and Amazon AMZN step to the plate tonight. Nvidia NVDA in three weeks. The Mag 7, like the New York Yankees, and every team that went up against the LA Dodgers this year, is running out of hitters. Seriously, I am thinking of going into Nvidia earnings either flat or even skinnier in the name than I already am. I am still short Tesla TSLA and I have added to that short, but that may amount to throwing a deck chair off of the Titanic in order to reduce the weight of the craft. As Chief Brody (Roy Scheider) once famously said... "You're gonna need a bigger boat."
Then There's This ... from SMCI
On Wednesday, news broke that Ernst & Young sent the members of the audit committee of the board of directors of Super Micro Computer SMCI a letter of resignation on Oct. 24. Is it good when the auditor for a firm already under some intense scrutiny resigns? Apparently not. SMCI was taken to the woodshed on Wednesday, suffering a beatdown of 32.7%. SMCI is now down 73.1% since its adjusted (for the split) February high.
On Jobs and GDP
On Wednesday morning, the ADP Employment Report stunned economists with a blowout print of 233,000 private sector jobs created in October. The positive print shocks as the ADP series has this year been far more accurate than have the BLS surveys and until now, have not told the happy tale that the BLS surveys have, at least until they are quietly revised lower, later.
I don't mean to rain on everyone's parade, but someone has to. There are warning signs of an even more bifurcated labor market in this report than we already knew we had. For one, 211,000 of those jobs were on the service providing side of the economy. That means that only 9.4% of jobs created had anything to do with the creation or provision of goods. Manufacturing, despite all of the money sunk into the Chips and Science Act, still posted a negative number for job growth.
Additionally, almost every single private sector job created in October, was created by medium to large-sized employers. There was practically no job creation across the nation for small businesses (under 50 employees). Small business has always been the backbone of demand for U.S. labor. What this means is an evolution in U.S. labor markets that will surely sprout some significant growing pains is likely under way.
Everyone seems to like the initial third-quarter GDP estimate of 2.8% growth (quarter over quarter, seasonally adjusted annual rate), despite its missing the consensus view of professional economists that had been for 3% growth. Remember gross domestic income does not print with the first estimate, so there are no checks and balances on this number.
Interestingly, personal consumption expenditures made its largest contribution since the first quarter of 2023, while gross private investment made its smallest since that same quarter. But federal spending was at its peak since first quarter 2021. Spending on defense was at its highest this third quarter, since at least 2020. That's how far back my info goes.
Without defense spending, gross domestic product would have printed at growth of 2.29%. Don't get me wrong. I love defense spending, but we have been subsidizing wars on other continents for almost three years now. Did someone pad the last GDP print going into a national election? I have no idea, but the sudden boost does seem odd given that the fiscal year runs dry on Sept. 30, and the third quarter is usually thin on defense spending. I have experienced Augusts and Septembers in my life where we had no live ammo to train with and had to wait for October for new funding. A strong Q3 for defense spending just is not natural.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 230K, Last 227K.
08:30 - Continuing Claims (Weekly): Last 1.897M.
08:30 - Personal Income (Sep): Expecting 0.4% m/m, Last 0.2% m/m.
08:30 - Consumer Spending (Sep): Expecting 0.4% m/m, Last 0.2% m/m.
08:30 - PCE Price Index (Sep): Expecting 0.1% m/m, Last 0.1% m/m.
08:30 - Core PCE Price Index (Sep): Expecting 0.2% m/m, Last 0.1% m/m.
08:30 - PCE Price Index (Sep): Expecting 2.1% y/y, Last 2.2% y/y.
08:30 - Core PCE Price Index (Sep): Expecting 2.7% y/y, Last 2.7% y/y.
09:45 - Chicago PMI (Oct): Expecting 47.8, Last 46.6.
10:30 - Natural Gas Inventories (Weekly): Last +80B cf.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: MO (1.35), EL (.09), HII (3.75), MA (3.75), MRK (1.57), SO (1.34), UBER (.62)
After the Close: AMZN (1.14), AAPL (1.53), TEAM (.65), INTC (-.03)
At the time of publication, Guilfoyle was long AMD, MSFT, SOFI, NVDA, SO, AMZN, INTC equity. Short TSLA equity.
