Behind The Street - Issue #5
October 26, 2021
October 26, 2021
Behind The Street Newsletter
Late is better than never, that’s a thing, right?
Anyway, Tis the season! earnings season that is.
Mega Cap Tech stocks will own the week as $AAPL, $FB, $AMZN, $GOOGL, and $MSFT all report quarterly results after a string of good and not so good reports last week. As discussed, $NFLX reported better than expected earnings driven by better-than-expected subscriber growth possibly due to the hit Korean show Squid Game.
Many analysts on the street raised price targets on the back of the earnings beat. $SNAP got clocked after hours when revenue and guidance came in light due in part to a change in Apple’s privacy policy, making it harder to target ads at consumers. This week may get volatile, but my views remain consistent with that of the past few weeks, the environment remains risk on and I expect the market to continue to plow to new all time highs. (As we got last week and again today) So what do we need to look out for this week?
Earnings Outlook:
Get ready for an action-packed week of earnings. Below are the top stocks on my watch list reporting earnings that have the power to move the markets. (I expect BIG numbers out of Microsoft due to increased cloud computing sales mainly from their Azure offerings.)
1) $FB – Reporting on October 25, 2021 - Revenue: $29.01 billion versus $29.45 billion expected. Revenue: $29.01 billion versus $29.45 billion expected. (Stock is up after hours as Wall Street looks towards EPS beat)
2) $AAPL – Reporting on October 28, 2021 (Potential massive earnings beat!)
3) $AMZN– Reporting on October 28, 2021
4) $GOOGL – Reporting on October 26, 2021 (Looking for strong growth in cloud computing offerings. Also pay attention to YouTube revenue)
5) $MSFT – Reporting on October 26, 2021 (Watch Azure Revenue growth)
6) $TEAM – Reporting on October 28, 2021 (Atlassian, we talk about this company a lot, I am long)
7) $AMD – Reporting on October 26, 2021
8) $DXCM -Reporting on October 28, 2021 (MUST WATCH)
9) $INMD – Reporting on October 26, 2021
Why is it so important to pay close attention to mega cap tech earnings? Well, these companies make up a large portion of the major indexes. Apple makes up nearly 6% of the S&P 500 with Microsoft not to far behind with just over 5%. Amazon takes up over 3% and Alphabet about the same.
$TSLA now has a market cap over 1 trillion dollars pushing its weighting to about 2%. The health of mega cap tech earnings will dictate where this market goes. This is one of the main reasons why I remain bullish on the S&P 500, I believe that these companies will continue to have significant earnings runway for the next 5 years. If you are long the S&P you will have great exposure to Americas most powerful tech earnings machines.
Overtime, price will follow earnings and earnings growth for large U.S. tech companies has been breathtaking. Remember, markets go up and markets go DOWN.
Many of us enjoy a market hitting new all time highs day in and day out, but just know that pull backs are bullish in an environment of stellar earnings and an accommodative federal reserve. Blow Out Tech Earnings + Easy Money + Low Interest Rates = Asset Price Inflation. (BTE + EM + LR = API, we have our little own equation now lol)
In my view cloud computing revenue is the most important category to zone in on when analyzing $MSFT, $AMZN, and $GOOGL earnings. Amazon has a cloud computing platform called AWS while Microsoft goes to market with its Azure platform followed by Google’s Google cloud.
In my view, cloud computing will be the number one profit center for these companies when we look out five to ten years. Cloud has an almost exponential growth trend and I believe we are still in the early inning for cloud adoption. This should also have a positive impact on data REITS such as Equinix $EQIX.
More on data REITS in future streams, please pay attention to this sector as it will continue to grow as 5G technologies and cloud adoption accelerates. American Tower, $AMT is one to watch as we move deeper into true 5G adoption with real use cases.
Hot out of the gate:
In last weeks Behind The Street we noted to pay attention to stocks that are declining less if not moving higher when the overall markets are correcting. We pointed out a few names that were showing relative strength such as $TEAM, $ZI, $NOW, HUBS, $TSLA, $UPST, and $NVDA.
You will notice that most if not all of these stocks are now the leaders in the market breaking new all time record highs. $NVDA – record high. $TEAM – record high. $NOW – record high. $UPST – record high. $TSLA – record high and so on. Now this isn’t always the case, but usually the stocks that are selling off the least tend to be “institutional favorites” for one reason or another.
If we look at the fundamentals on an EPS and revenue bases, the stocks listed above are of some of the best quality in the market. 25%+ EPS growth q/q, likewise with revenue. This brings us back to the main point that I try to drive home on each livestream and Newsletter: EARNINGS & FUNDAMENTALS MATTER!
The US10 YR is at the upper end of its range at 1.638%. A break above 1.72% should mean trouble for high growth tech stocks. Higher yields tend to put pressure on tech stocks where large earnings are projected in the future.
Higher yields mean that their future earnings are worth less. Again, this is not the case every time and often tech names do very well in an environment where yields are increasing. I am looking for stability in the US10 YR.
What we don’t want to see is an uncontrolled sell of where yields spike rapidly, a slow steady rise is normal. As of now the bond and credit markets seem fine. So long as liquidity is flowing, and banks are lending the show goes on.
Are we in a housing bubble? Answer: Yes, wait, No. Let me explain
This is the number one question I have been getting via email.
I tend to believe that when the average American on an average salary can no longer to afford to buy a home, we are in a housing bubble. But this time it’s different. Oh No! I just said (typed) the famous last words!
Let’s take a step back and look at what is really going in the housing market and take a dive into what caused the last housing crash. As we know, the housing market is on fire with many homes getting multiple offers over asking and even selling sight unseen. But when we look at who these buyers are they seem to be very well qualified and well capitalized.
The issue in 2008 was that many unqualified people were unfortunately qualifying for mortgages, many of which with teaser rates attached to the mortgage. A teaser rate is an extremely low interest rate attached to a home loan that has an expiration date. When this “teaser” rate expires, the homeowner will get clocked with a massive rate increase, thus increasing the amount of their mortgage payment. When the federal reserve started to raise rates, millions of Americans started to default on their mortgage payments, forcing them into foreclosure.
Many of the mortgages were subprime with no income verification and little to no money down on the properties.
This time it’s different, many buyers are coming in over asking with all cash offers or strong down payments. Even though home prices are getting bid up, buyers seem to be qualified and can afford to pay more since interest rates are so low. Buyers are taking advantage of low fixed rate mortgages, meaning the interest rated is locked for the duration of the loan.
The federal reserve has successfully exacerbated the wealth gap in this country by making money essentially free to wealthy investors that can qualify for loans. Artificially low interest rates and easy money increases the price of assets for which the top 1% own the majority.
So how long can the housing market sustain? That’s anyone’s guess but I do not think we will see 50-60% declines in housing prices. Perhaps a 20% correction as we make our way out of pandemic craziness.
Distribution Days: (Days where index sells off in heavier volume than previous day. Signaling institutional selling. 5 - 6 distribution days in the span of 4 weeks signals market weakness) Investor’s Business Daily
Current Distribution Count: 1 on NASDAQ
Leaders up in volume: $NFLX, $SIVB
Leaders down in volume: $SNAP, $CMG, $TASK
Crude oil is going gangbusters and that means higher equity prices. This market is very dependent on crude oil in part because when crude is higher so are financials such as the large investment banks that have massive exposure to crude. This in turn lifts the market higher.
I still maintain my view that we will have crude oil prices above $100, but we need a pull back. Should we get a pull back in crude and the market sells off, this would be a buying opportunity in my eyes. We need to remember the BIG picture, and that is the Fed is not finished buying it all.
They will continue with over $140 billion in asset purchases a month and interest rates will remain rock bottom. This is positive for stocks and very negative for the average American that is about to get rocked with a second wave of inflation.
Bitcoin and Ethereum are acting quite well but now extended over 20% above the 50 day moving average. A pull back should be healthy and, in my view, a pull back to the 50 would be a good place to add to existing positions. The trend is your friend, and the trend remains up!
Thank You