Morning Minutes 10/23/2018

Stock Selloff Resumes amid Earnings and Guidance Disappointments

October 23, 2018
9:00 am EDT

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Market Commentary By:
Colin Cieszynski, CFA, CMT
Chief Market Strategist
+1 (647) 282-4428

As I had indicated in yesterday’s Morning Minutes, the China relief rally turned out to be nothing more than a dead cat bounce. Today the bears have taken over again in earnest driving markets downward. While Shanghai falling 2.6% and the Hang Seng dropping more than 3.0% look bad enough, technical breakdowns by the Nikkei (down 2.6%) and the Dax (down 1.8%) appear even more bearish, signaling a broad market retreat.

The US is heading toward a lower open as well with Dow futures down 425 points or 1.7%. Big misses from the Industrials sector indicate that concern companies may not be able to meet inflated expectations was justified and that the next several weeks could see a major readjustment.

Caterpillar is down 6% premarket. EPS of $2.88 were above street $2.85, and sales of $13.51B beat the street, but by maintaining its full year EPS guidance of $11.00-$12.00, the midpoint came in below the $11.65 street estimate. This shows that in the current environment, many investors are looking for any excuse to head for the door.

Harley-Davidson shares have dropped 5% in premarket trading. The motorcycle manufacturer’s earnings bounced back in a big way, as the company reported EPS of $0.68, well above the $0.53 street estimate. Expectations for Harley had already been cut back after last quarter’s big disappointment. Sales, however, continued to disappoint. Although European sales rebounded, a 13.3% drop in US sales from a year ago dragged overall sales down 7.8%. It sure looks like the US tariffs on steel, which have raised the cost of buying autos and motorcycles in the US, are starting to really take their toll. Tomorrow’s results from Ford may provide confirmation.

3M, could come under pressure today as well. The company missed on EPS ($2.58 below street $2.72), sales ($8.20B below street $8.43B) and guidance (full year EPS $9.90-$10.00 below street $10.28), and the street does not appear to be in a forgiving mood. United Technologies also missed estimates, reporting EPS of $1.54, well short of the $1.82 the street had been expecting.

On the positive side, McDonalds beat the street, reporting EPS of $2.10 above the $1.99 consensus analyst estimate.

Amid growing fear and volatility, it’s no surprise that the VIX has popped back above 20 and soared on toward 24, while Gold has rallied 1.25% to approach $1,235/oz. On the other hand, WTI crude oil is down 1.75% under $70 while Brent Crude is back under $80 falling 2.1% after Saudi Arabia indicated it plans to keep the market well supplied and offset the impact of sanctions on Iran even through its political disputes with other countries.

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