And so It Begins....Banks Beat but Come Under Pressure

Stocks 'backed off' just a bit...yesterday as earnings season is now officially underway.....as discussed the Financials are taking center stage for the next week......and yesterday's performance by JPM and C - while 'beating the estimates' did little for the 'feel good mood' that has been prevalent of late.....Yes....both JPM and C did it again....lost money on the broad top line as certain business lines outperformed while other business lines disappointed......yet managed to beat on the (lowered) bottom line by paying extra close attn to costs..... Trading across the board took it on the chin.....while growth in credit card lending helped to balance out the books.....Either way - as we have pointed out - even though both firms 'beat' the estimates - traders/investors were not overwhelmed and ended up putting pressure on the whole group as they re-assessed the reasons for all of the gains since Trump was elected President....

Understand that the financials have all rallied significantly since November......The XLF is up a whopping 36% since that night.....and the individual names are up even more....JPM +45%, C 58%, GS + 40%, WFC 25%, BAC + 58%......and then in the last month or two - investors/traders took them up even more as the anticipation of tax cuts, fiscal reform and higher interest rates fueled the story.......so when the confession happens - investors/traders/analysts get to re-consider the investment thesis......and while all of these stocks have broken out and pierced their pivot points...nothing says that they won't do an about face and pull back a bit as those same investors/traders/analysts adjust.  Today we will hear from PNC exp $2.13/sh, BAC - exp $0.45/sh and WFC exp $1.02/sh.....Now PNC won't have the trading issues that the big boys do, so there story will be different......

The financials  remain in the Underperforming and Improving quadrant on my rotational graph - but they do appear to be moving into the Outperforming and Improving quadrant - and this is important as we move thru earnings season...Financials need to be out in the lead.....especially if the FED suggests that rates are going higher....Financials will be a beneficiary of higher rates, unless of course - higher rates brings the economy to a slowdown (dare I say standstill?)

Telecoms also got hit upside the head yesterday after American Telephone (T $35.86)  slid by $2.33 or 6%...on the back of their 3rd  qtr warning, saying they lost 90,000 US video subscribers due to intense competition and the impact of the hurricanes...... other members of the group fell in sympathy.......VZ -1%,  TDS - 1.24%, S - 0.7%, USM - 1.18%.  The Telecom  IShares ETF (IYZ) fell 0.93% leaving that passive investment vehicle down 15.7% ytd..... while the S&P Telecom ETF (XTL) fell 27 cts leaving that passive investment flat on the year.....I guess S&P does a better job of identifying the constituents of their funds.... Just sayin.....

Now the mkt  has been making new highs while  price valuations keep accelerating, the truth is the S&P companies have seen corporate earnings decline from the 1st qtr and that is about to become clearer in the days ahead....The first quarter, largely because of the energy sector rally in 2016,  saw a 16% growth rate for the S&P – which then slowed to 11% growth rate in the 2nd qtr and is about to slow to 5% this qtr.....

At the industry level, the insurance industry has suffered the largest decline in dollar-level earnings.......going from $9.9 billion to $5.1 billion - a stunning $4.8 bil decline.... and energy?  Well this  sector is also expected to record the largest drop in expected growth on a y/y basis.....That rally in oil prices that began in January 2016 and saw a 53% appreciation is oil prices is wearing off and while new technologies etc have helped the industry become more efficient - oil prices are lower today than they were in December 2016 and have remained in a tight range of $44 - $50 barrel for most of this year.  The energy sector ETF (XLE) has rallied nicely since the lows of August and is up 11% since then and is now struggling with long term resistance at $68.28/sh....Watch this stock in the weeks ahead....if it fails here - expect it to test $65.50 again...If we break out then this stock could test $71 ish....Now oil is trading up $1 this morning as stories circulate about rising demand...blah, blah, blah.....and if demand rises - then watch as the US producers increase production.....

US futures are up $1 ....Trump did sign an executive order that will start to unwind Obamacare.....ending subsidies to the health insurers.....This will have broad implications across the spectrum for Americans, for Obamacare and for the insurers.....Now most insurers have expected this and so they built that into their 2018 pricing which will see some plan premiums go up high double digits....Democrats are incensed....Chucky Schumer and Nance Pelosi screaming foul ball......When are both sides going to realize that the system is broken and come to the table to do what is right? 
 
Eco data today includes: CPI - exp of +0.6%, ex food and energy of +0.2% and Y/Y ex food and energy of +1.8%.....Retail sales of +1.7%, ex autos and gas of +0.4%...there are several Fed speakers today, the most important of which is Jay Powell at 1:00 p.m. ET.  Other speakers include  Eric Rosengren (Boston - 8:30 a.m. ET), Charlie Evans (Chicago -10:25 a.m. ET), and Bobby Kaplan (Dallas - 11:30 a.m. ET), but these guys should not say anything that will move mkts. 
 
In the end.....today's  economic data may cause a bit of noise (think hurricanes)...watch the 10 year yield.  If it breaks below 2.30%, then that’s not good, and you can expect the pressure to build on stocks again.....with the banks getting kicked in the gut, as confidence in the re-flation trade begins to erode.   
 
Gold is down $1.....as it continues to tease resistance at $1,299
 
On the Chubby front - (Kim Jung On - North Korea) - has been quiet - yet missile launch signals are rising again in the near term......with both 14 day and 30 day signals now turning higher...... This does not suggest an imminent launch - but it does suggest that he may be up to something.....
 


Potato & Onion Soup  

An easy soup to make -  for this you will need:
2 lbs of peeled potatoes, 2 lg Vidalia onions, butter, olive oil, beef broth, fresh grated parmegiana cheese, chopped parsley.

Begin by cutting the peeled potatoes into cubes and then rinse in cold water.

Next – melt a bit of butter and oil in a large pot….now add the sliced onion and sauté until nice and golden brown- keep the heat on low and cook slowly – you want them to brown and not burn. 

Now add the cubed potatoes and raise the heat to hi – you have to keep stirring the potatoes and coat in the onions…after about 8 mins or so….add in the beef broth – you want to make sure that the potatoes are covered and then some….- bring to a boil and then reduce the heat to med low and continue to cook.  When the potatoes are cooked – you can remove a couple of ladles of the potatoes….now with the hand blender – puree the potatoes in the soup….if you think it becomes too thick – then add a cup of water. 

Add back the potatoes, stir in a handful (or two) of grated parmegiana cheese and the parsley...taste for seasoning and then serve in warmed bowls.  Always have extra cheese on the table.

Buon Appetito.

The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O’Neil Securities, Incorporated or its affiliates.