A couple of weeks ago, my family and I were waiting to be seated at a big chain restaurant when I overheard a conversation among three young men who looked to be about 19- to 20- years- old.
Young man in sweater: Yes... my dad still short it.
Young man in flannel shirt: No way!!!!
Young man in sweater: Yes...and he just binged watching "Breaking Bad!"
Young man in football jersey: (facial expression of bewilderment): What???
These young men got what their parents can't grasp: the absurdity of hating a stock (in this case, Netflix), or even the stock market in general when they happen to be the very consumers, that add validity to the corporate earnings story. People find lots of reasons to hate things, but shorting a stock that represents a place you spend your money is ludicrous, and is not unusual these days. Sure, one could argue about valuation, but even then, it would be easier to have disdain for a product that doesn't command your money or time (so much time).
A predisposition to disliking stocks and the market is always disastrous; assuaged every few years, but the broad misery of market crashes mitigates the ability to gloat—unless you're selling another book.
Earnings Season...A Second Look
The stock market is more than numbers and stock symbols, and corporate earnings are more than numbers and consensus. The stock market reflects people around the world, in all aspects of human life, while earnings are a check-up on those people and their economic backdrop. It's a shame this isn't covered better in the media, because it can help policy decisions, and can be cathartic; or underscore the need for action.
The reaction to earnings is often less important than what we can gleam from both a macro and a micro perspective.
Don't get me wrong, we always want stocks we own (and even those we don't) to react positively to good news or even the would-be silver linings. But it's important to take from companies that operate in the real world, what the government and industry surveys could never tell us: the real deal.
Singing in the Pain
Slowly the cars began to move. Slowly they climbed the steep hill. As they climbed, each little steam engine began to sing:
"I-think-I-can! I-think-I-can! I-think-I-can! I-think-I-can! I-think-I-can! I-think-I-can! I think I can - I think I can - I think I can I think I can--"
-The Little Engine that Could
On that note, while the Dow was off for the second consecutive session because of a big name (in this case IBM); breadth was positive, and there were other earnings reported that were more reflective of the general society. Norfolk Southern (NSC) is a much better proxy, and tells a more positive story about the economy.
The railroad covers 22 eastern states and all the major container ports in the region, making it a pretty good proxy for the American economy. Volumes were up for all parts of the business, except for coal, and each enjoyed strong year-over-year gains in revenue:
- Chemical +21%
- Metal/Construction +12%
- Intermodal +6%
- Agriculture +9%
- Automotive +10%
- Paper & Forest +8%
- Coal -2%
These business segments cover critical parts of our economy (the chemical segment is mostly crude-by-rail), and they must play a major role in any recovery. Norfolk Southern set fourth quarter records for revenue, income from operations, net earnings per share, along with full-year marks for revenue and efficiency. Just as important was management announcing a 12% hike in capital expenditure to $2.2 billion in 2014.This speaks to a need to bulk up for growing demand.
The US economy is in the midst of a feeble recovery, but has the ability to chug along and gain momentum, but its biggest challenge is a steep hill in the form of an administration, intent on dismantling the system. If there were no war on capitalism, all the numbers above would be even more robust with the biggest gain coming from the growth in coal, because in the real deal, it’s cold outside.
There are a lot of games and shenanigans in the stock market, and lots of artificial influences that move the needle from time to time, but in the end it reflects people, and sometimes in a more flattering manner than we see ourselves.
Throwing Down the Gauntlet
Talk about firing on all cylinders, Netflix (NFLX) posted earnings results after the close that sent the stock into the stratosphere. Revenues were in line, but earnings were huge as more people jumped on board both domestically and abroad. (Of course, the dirty little secret is that more than 6 million people are still getting DVDs in the mail and paying top dollar for the privilege. That business pumped in $100.0 million in profits, versus $174 million for domestic streaming, and a $57 million loss outside the United States.)
Management is cocky!
They expect another 2.25 million people to subscribe domestically this quarter plus 1.6 million internationally, bringing the totals to 35.7 million and 12.5 million respectively. Essentially, the company is building an army of subscribers and plans to use them if any internet service provider gets stupid.
On net neutrality:
Unfortunately, Verizon successfully challenged the U.S. net neutrality rules. In principle, a domestic ISP now can legally impede the video streams that members request from Netflix, degrading the experience we jointly provide. The motivation could be to get Netflix to pay fees to stop this degradation. Were this draconian scenario to unfold with some ISP, we would vigorously protest and encourage our members to demand the open Internet they are paying their ISP to deliver.
Somewhere in New Jersey, there's a 19-year-old young man needling his dad about betting against his spending habits. That's assuming dad isn't betting the college money. If it's any consolation, dad can point to the 13% short position and all those downgrades as proof, that he wasn’t the only person that hated one of the hottest products in the country.
China posted a PMI reading of 49.6 for the month of January, down from 50.5 in December and below consensus of 50.3. Early in the global recession, it was demand from China that kept the world spinning but they grew too fast, and for the last couple of years their government has attempted to slow down without completely derailing and taking the world along for the crash. There might be some noise in the number, but it’s clear China’s battle to control inflation, and its shadow banking situation while keeping billionaires from fleeing or sending their cash abroad, has been a challenge.
There are more earnings misses this morning but nothing cataclysmic. Union Pacific (UNP) echoed sentiment derived from Norfolk Southern with its first volume increase in six quarters. Management says it’s passing higher cost to customers and feels confident about 2014.